Cross-National Cooperation and Agreements

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.
 Imbalances in the mobility of factors of production are often addressed in strategies for
cross-national integration.
 Economic integration is a term used to describe the political and monetary agreements
among nations and world regions in which preference is given to member countries.
 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.
1. Global integration—Countries from all over the world decide to cooperate through the
World Trade Organization (WTO)
2. Bilateral integration—Two countries decide to cooperate more closely together, usually
in the form of tariff reductions
3. Regional integration—A group of countries located in the same geographic proximity
decide to cooperate, as with the European Union
 Reasons for Economic Integration:
1. They can define the size of the regional market and the rules under which a
company must operate. In fact, an increase in market size is their single most
important reason for existing. A company in the initial stages of foreign expansion
must be aware of how the groups encompass countries with good manufacturing
locations or market opportunities.
2. As a company expands internationally, it must change its organizational structure
and operating strategies to continually benefit from these alliances.
3. Managers are very interested in trade agreements because of their potential to
affect the regions where they source their purchases and to reduce costs and
improve quality.

General Agreement on Tariffs & Trade (GATT)

 The General Agreement on Tariffs and Trade (GATT) is a multilateral agreement
regulating international trade.
  According to its preamble, its purpose is the "substantial reduction of tariffs and other
trade barriers and the elimination of preferences, on a reciprocal and mutually
advantageous basis."
 It was negotiated during the UN Conference on Trade and Employment and was the
outcome of the failure of negotiating governments to create the International Trade
Organization (ITO).
 GATT was signed in 1947 and lasted until 1993, when it was replaced by the World
Trade Organization in 1995. The original GATT text (GATT 1947) is still in effect under
the WTO framework, subject to the modifications of GATT 1994.

The World Trade Organization (WTO)

 The World Trade Organization (WTO) was founded in 1995 as a permanent world trade
body for the purposes of
1. facilitating the development of a free and open international trading system
according to the GATT and
2. 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.
 Among the various functions of the WTO, these are regarded by analysts as the most
important:
1. It oversees the implementation, administration and operation of the covered
agreements.
2. It provides a forum for negotiations and for settling disputes.
 There are three types of provision in this direction:
1. Articles allowing for the use of trade measures to attain non-economic objectives;
2. Articles aimed at ensuring "fair competition"; members must not use environmental
protection measures as a means of disguising protectionist policies.
3. Provisions permitting intervention in trade for economic reasons.

Principles of the Trading System

1. Non-discrimination

Each member nation must open its markets equally to every other member nation. Member
countries should trade without discrimination, basically giving foreign products “national
treatment.”
Although the WTO restricts this privilege to official members, some exceptions are allowed, as
follows:

 Developing countries’ manufactured products have been given preferential treatment

over those from industrial countries.
 Concessions granted to members within a regional trading alliance, such as the EU, have
not been extended to countries outside the alliance.
 Countries can raise barriers against member countries who they feel are trading
unfairly.
Exceptions are made in times of war or international tension.

2. Reciprocity

It reflects both a desire to limit the scope of free-riding that may arise because of the
MFN rule and a desire to obtain better access to foreign markets. A related point is that
for a nation to negotiate, it is necessary that the gain from doing so be greater than the
gain available from unilateral liberalization; reciprocal concessions intend to ensure that
such gains will materialize.

3. Binding and enforceable commitments

The tariff commitments made by WTO members in multilateral trade negotiation and on
accession are enumerated in a legal instrument known as a schedule (list) of concessions.
These schedules establish "ceiling bindings": a country can change its bindings, but only
after negotiating with its trading partners, which could mean compensating them for loss
of trade. If satisfaction is not obtained, the complaining country may invoke the WTO
dispute settlement procedures.

4. Transparency

The WTO members are required to publish their trade regulations, to maintain
institutions allowing for the review of administrative decisions affecting trade, to respond
to requests for information by other members, and to notify changes in trade policies to
the WTO. These internal transparency requirements are supplemented and facilitated by
periodic country-specific reports (trade policy reviews) through the Trade Policy Review
Mechanism. The WTO system tries also to improve predictability and stability,
discouraging the use of quotas and other measures used to set limits on quantities of
imports.

5. Safety valves
 In specific circumstances, governments are able to restrict trade. The WTO's agreements
permit members to take measures to protect not only the environment but also public
health, animal health and plant health.

Regional Economic Integration

 Regional integration is a process in which states enter into a regional agreement in order
to enhance regional cooperation through regional institutions and rules.
 The objectives of the agreement could range from economic to political, although it has
generally become a political economy initiative where commercial purposes are the
means to achieve broader socio-political and security objectives.
 It could be organized either on a supranational or an intergovernmental decision-making
institutional order, or a combination of both.
 Some of the best known RTAs are
1. European Union,
2. European Free Trade Association (EFTA),
3. North American Free Trade Agreement (NAFTA)
4. Southern Common Market (MERCOSUR),
5. ASEAN (Association of Southeast Asian Nations)
6. Free Trade Area (AFTA),
7. Common Market of Eastern and Southern Africa (COMESA)

Functions of Regional Integration

1. The strengthening of trade integration in the region

2. The creation of an appropriate enabling environment for private sector development
3. The development of infrastructure programs in support of economic growth and
regional integration
4. The development of strong public sector institutions and good governance;
5. The reduction of social exclusion and the development of an inclusive civil society
6. Contribution to peace and security in the region
7. The building of environment programs at the regional level
8. The strengthening of the region’s interaction with other regions of the world.

Reasons for Economic Integration

1. Shorter distance between/among the countries—less transportation costs.

2. Consumers’ tastes are similar.
3. Neighboring countries may have a common history & interests, & they may be more
willing to coordinate their policies.
Types of Regional Economic Integration
1. Free Trade Agreement (FTA)

No Internal Tariffs

The goal of an FTA is to abolish all tariffs between member countries. It usually begins modestly
by eliminating them on goods that already have low tariffs, and there is usually an
implementation period during which all tariffs are eliminated on all products included in the
agreement. Moreover, each member country maintains its own external tariffs against non-FTA
countries. About 90 percent of the RTAs identified by the WTO are free trade agreements.

2. Customs Union

No internal tariffs plus common external tariffs.

In addition to eliminating internal tariffs, member countries levy a common external tariff
on goods being imported from nonmembers in order to establish a customs union.

For example, when the EU was organized in 1957, it began to remove internal tariffs among
member states, but in 1967 it eliminated the remaining internal tariffs and established a
common external tariff, meaning that goods shipped into one member country from abroad
are free from tariffs in the rest of the member countries. Now the EU negotiates as one
region in the WTO and other regional and bilateral agreements rather than as separate
countries.

3. Common Market (or Economic Integration Agreement)

Customs union plus factor mobility.

Beyond the reduction of tariffs and nontariff barriers, countries can enhance their
cooperation in a variety of other ways.

The EU also allows free mobility of production factors such as labor and capital. This means
that labor, for example, is generally free to work in any country in the common market
without restriction.

4. Economic Union

An economic union entails even closer economic integration and cooperation than a
common market. The countries may also coordinate social and financial policies to support
this common market.
 For instance, EU has harmonized its monetary policies through the creation of a common
currency, complete with a central bank. This level of cooperation creates a degree of
political integration among member countries, which means they lose a bit of their
sovereignty.

The Effects of Integration

1. 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.
 The strategic implication is that companies that were unable to export to another country—
even though they might be more efficient than producers there—are now able to export
when the barriers come down, creating more demand for their products and less for the
protected ones. Investment also might shift to countries that are more efficient or that have
a comparative advantage in one or more factors of production.

2. 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.)

Assume, for example, that U.S. companies are importing the same product from Country A and
Country B. If the United States enters into an RTA with Country A, U.S. companies might be
more likely to import goods from Country A than from Country B due to lower tariffs, other
things being equal. Moreover, MNEs from countries outside the RTA might consider investing in
the RTA countries to service the market more effectively. Trade diversion is a major criticism of
RTAs because the agreements result in greater trade among a few WTO members but not
among all. This undermines the multilateral process of the WTO.