International Management

McGraw-Hill/Irwin International Management

Phatak, Bhagat, and Kashlak

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Chapter 2

The Global Macro-Economic Environment

McGraw-Hill/Irwin International Management

2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

2-3

Chapter Learning Objectives

Discuss potential effects of the growth of regional trade blocs on global free trade. Explain the differences and similarities between a free trade area, a customs union, a common market, an economic union and a political union. Describe the static and dynamic benefits of regional economic integration as well as the supply-side led benefits that will accrue to member countries. Describe the key features of the Uruguay Round of the GATT and the WTO and their implications for the conduct of business between member countries.

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Chapter Learning Objectives

(contd.)

Discuss the significance of the WTO to international trade. Describe the important characteristics of NAFTA and the European Union. Discuss the ways in which the major regional economic agreements can be expected to improve business opportunities, and problems associated with their implementation. Examine the phenomenon of Globalization and its meaning. Evaluate the significance of country-specific economic features and competitiveness rankings to international companies.

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Chapter Topics
A New Global Economy The General Agreement on Tariffs and Trade and the World Trade Organization Country-Level Economic Integration The Effects of Economic Integration Major Regional Economic Agreement Initiatives Will Regional Trade Blocs Promote Global Free Trade? Globalization Country-Specific Economic Environments and Country Competitiveness

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Major Developments Favoring Free Trade

The emergence of the World Trade Organization (WTO)

The emergence of regional trade blocs, such as the North American Free Trade Agreement (NAFTA), the expanded EU, and other regional trade agreements like MERCUSUR in South America

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Reasons Why Trade Blocs Get Formed

Geographical proximity and often the sharing of common borders as in the European Union and NAFTA Common economic and political interests as in the European Union and the ASEAN Similar ethnic and cultural backgrounds as in the Free Trade of the Americas Similar levels of economic development as in the European Union Similar views on the mutual benefits of free trade as in NAFTA Regional political needs and considerations as in the ASEAN

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Fig. 2-1: A Hierarchy of Regional Economic Integration Initiatives

Free Trade Area Customs Union

Elimination of Trade Barriers

+ Common External
Trade Positions

Common Market
Economic Union Political Union

+ Labor/Capital
Mobility

+ Coordinated Economic
and Fiscal Policy

+ Coordinated Political
and Social Policy

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Table 2-1: Types of Trade Blocs

Level of Integration No Tariffs and Quotas Common Tariffs and Quotas No Restrictions on Factor Movements
Harmonized/uni fied Eco. Policies & Institutions Unified Eco. & Political Policies & Institutions

Free Trade Area

Yes

No

No

No

No

Customs Union
Common Market Economic Union Political Union

Yes
Yes Yes Yes

Yes
Yes Yes Yes

No
Yes Yes Yes

No
No Yes Yes

No
No No Yes

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Fig. 2-2: Regional Economic Integration Benefits

Removal of Trade And Investment Barriers

Competition Increases/ More Investors

Industry Innovation Increases

New Product Development

Initial Costs Drop

New Process Development

Prices Drop

Reallocation/Consolidation of Resources (Comparative Advantage)

Demand Increases

Production Levels Rise

Economies of Scale Benefits

Lower Costs And Supply-Side Led Growth

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Major Regional Economic Agreement Initiatives

The North American Free Trade Agreement (NAFTA)
U.S.A, Canada, and Mexico Went into effect on January 1, 1994

Free Trade Area of the Americas

Proposal to expand NAFTA to include all countries in the Western Hemisphere, except Cuba This region accounts for 37% of all U.S. trade, $155 billion in American investment, 800 million people, and a $13 trillion economy

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Major Regional Economic Agreement Initiatives

(contd.)

The Association of Southeast Asian Nations (ASEAN)

Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Laos, Myanmar, and Cambodia Total population of 500 million, area of 4.5 million square kilometers, GDP of U.S. $737 billion, a total trade of U.S. $ 720 billion

Mercado Comun del Sur (MERCOSUR)

Argentina, Brazil, Paraguay, and Uruguay

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Major Regional Economic Agreement Initiatives

(contd.)

Market of nearly 200 million people, area of about 12.5 million square miles, combined gross regional product in excess of $800 billion, and Latin Americas largest industrial base

The European Union (EU)

15 countries currently members Market area of 320 million people Historically known as the Common Market Created after World War II Similarities between EU and the United States

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Major Regional Economic Agreement Initiatives

(contd.)

Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, and Slovenia set to join EU on May 1, 2004 Bulgaria and Romania hope to do so by 2007 To join the EU, countries need to fulfill economic and political conditions known as the Copenhagen Criteria.

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Table 2-2: Exports within Trade Blocs

1990
NAFTA EU ASEAN
MERCOSUR

1995
394472 1259699 81911 14199

1996
437804 437804 86923 17075

1997
496423 496424 88770 20772

1998
521649 1226988 71669 20352

1999
581162 1376314 81929 15313

226273 981260 28648 4127

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Globalization
The growing economic interdependence of countries worldwide, the increasing integration of economic life across political boundaries, through the increasing volume and variety of cross-border transactions in goods, services, capital flows, and rapid and widespread diffusion of technology

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Specific Drivers of Globalization

1. 2.

3.
4. 5. 6.

Tremendous growth in international trade and commerce Innovations in information technology and transportation Porous borders between countries The globalization of financial markets The creation of a global labor force Rapidly falling freight costs

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Factors Multinationals Must Consider Prior to Deciding Entry Mode

Determine the key success factors for the business, i.e. the conditions that must be present in the foreign market in order to succeed in achieving the objectives of the market entry 2) Study whether these conditions exist in the target market 3) Determine changes in implementation strategies that would be required in order to succeed in the target market
1)

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Table 2-6: 2003 Competitive Ranking of Countries (top twenty)

Country
United States Finland Taiwan

Competitiveness Ranking
1 2 3

Singapore
Sweden Switzerland Australia Canada Norway Denmark

4
5 6 7 8 9 10

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Table 2-6 (contd.)

Country
United Kingdom Iceland Japan

Competitiveness Ranking
11 12 13

Germany
Netherlands New Zealand Hong Kong Austria Israel Chile

14
15 16 17 18 19 20

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Key Terms and Concepts

GATT WTO WTO Settlement of Disputes Free Trade Area Customs Union Common Market Economic Union

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Key Terms and Concepts (contd.)

Political Union Economic Integration NAFTA EU ASEAN Globalization