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Editor's Notes

1. To ensure that the post-World War II international peace would not be threatened by such trade wars, representatives of the leading trading nations met in Havana, Cuba, in 1947 to create the International Trade Organization (ITO). The ITO’s mission was to promote international trade; however, the organization never came into being because of a controversy over how extensive its powers should be. Instead the ITO’s planned mission was taken over by the General Agreement on Tariffs and Trade ( GATT ), which had been developed as part of the preparations for the Havana conference. From 1947 to 1994, the signatories to the GATT (the GATT was technically an agreement, not an organization) fought to reduce barriers to international trade. The GATT provided a forum for trade ministers to discuss policies and problems of common concern. In January 1995, it was replaced by the World Trade Organization, which adopted the GATT’s mission.
2. The GATT’s goal was to promote a free and competitive international trading environment benefiting efficient producers, an objective supported by many multinational corporations (MNCs). The GATT accomplished this by sponsoring multilateral negotiations to reduce tariffs, quotas, and other nontariff barriers. Because high tariffs were initially the most serious impediment to world trade, the GATT first focused on reducing the general level of tariff protection. It sponsored a series of eight negotiating “rounds,” generally named after the location where each round of negotiations began during its lifetime. The cumulative effect of the GATT’s eight rounds was a substantial reduction in tariffs. Tariffs imposed by the developed countries fell from an average of more than 40 percent in 1948 to approximately 3 percent in 2005.
3. To help international businesses compete in world markets regardless of their nationality, the GATT sought to ensure that international trade was conducted on a nondiscriminatory basis. This was accomplished through use of the most favored nation ( MFN ) principle , Under GATT rules, all members were required to utilize the MFN principle in dealing with other members. For example, if the United States cut the tariff on imports of British trucks to 20 percent, it also had to reduce its tariffs on imported trucks from all other members to 20 percent. Because of the MFN principle, multilateral, rather than bilateral, trade negotiations were encouraged, thereby strengthening the GATT’s role.
4. There are two important exceptions to the MFN principle: To assist poorer countries in their economic development efforts, the GATT permitted members to lower tariffs to developing countries without lowering them for more developed countries. In the U.S. tariff code, such reduced rates offered to developing countries are known as the generalized system of preferences . The second exemption is for regional arrangements that promote economic integration, such as the EU and NAFTA.
5. The eighth and final round of GATT negotiations began in Uruguay in 1986. The participants agreed to create the WTO. The World Trade Organization came into being on January 1, 1995. Headquartered in Geneva, Switzerland, as of May 2006 the WTO includes 149 member and 32 observer countries. Members are required to open their markets to international trade and to follow the WTO’s rules. The three primary goals of the WTO are listed in the slide.
6. The WTO was clearly designed to build on and expand the successes of the GATT; indeed, the GATT agreement was incorporated into the WTO agreement. The WTO differs from the GATT in two important dimensions. First, the GATT focused on promoting trade in goods, whereas the WTO’s mandate is much broader: It is responsible for trade in goods, trade in services, international intellectual property protection, and trade-related investment. Second, the WTO’s enforcement powers are much stronger than those possessed by the GATT.
7. The WTO faces a variety of challenges. One is dealing with sectors of the economy that seemingly receive government protection in every country. Two such sectors are agriculture and textiles. Trade in many agricultural products has been distorted by export subsidies, import restrictions, and other trade barriers. The Cairns Group , a group of major agricultural exporters led by Argentina, Australia, Brazil, Canada, and Thailand, is pressuring other WTO members to ensure that the Doha Round significantly reduces barriers to agricultural trade. Similarly, trade in textiles had been governed since 1974 by the Multifibre Agreement , which created a complex array of quotas and tariffs. Another challenge facing the WTO is reducing barriers to trade in services. The Uruguay Round developed a set of principles under which such trade should be conducted. One nondiscriminatory approach is the use of national treatment , whereby a country treats foreign firms the same way it treats domestic firms. Entrepreneurs, artists, and inventors have been hurt by inadequate enforcement by many countries of laws prohibiting illegal usage, copying, or counterfeiting of intellectual property. These problems are particularly widespread in the music, filmed entertainment, and computer software industries. On paper, the Uruguay Round agreement substantially strengthened the protection granted to owners of intellectual property rights and developed enforcement and dispute settlement procedures to punish violators. Accordingly, the TRIMS agreement in the Uruguay Round is but a modest start toward eliminating national regulations on FDI that may distort or restrict trade.
8. The enforcement power of the GATT was notoriously weak. Under WTO rules, a country failing to live up to the agreement—for example, by imposing a nontariff barrier contrary to the WTO agreement—may have a complaint filed against it. If a WTO panel finds the country in violation of the rules, the panel will likely ask the country to eliminate the trade barrier. If the country refuses, the WTO will allow the complaining country to impose trade barriers on the offending country equal to the damage caused by the trade barrier. Furthermore, the offending country is not allowed to counterretaliate by imposing new trade barriers against the complainant.
9. Regional trading blocs differ significantly in form and function. The characteristic of most importance to international businesses is the extent of economic integration among a bloc’s members. This is of utmost importance because it affects exporting and investment opportunities available to firms from member and nonmember countries. There are five different forms of regional economic integration: free trade area, customs union, common market, economic union, and political union.
10. A free trade area encourages trade among its members by eliminating trade barriers (tariffs, quotas, and other nontariff barriers [NTBs]) among them. An example of such an arrangement is NAFTA, which reduces tariff and NTBs to trade among Canada, Mexico, and the United States. A customs union combines the elimination of internal trade barriers among its members with the adoption of common external trade policies toward nonmembers. Because of the uniform treatment of products from nonmember countries, a customs union avoids the trade deflection problem. A firm from a nonmember country pays the same tariff rate on exports to any member of the customs union. Members of a common market eliminate internal trade barriers among themselves, adopt a common external trade policy toward nonmembers, and eliminate barriers that inhibit the movement of factors of production—labor, capital, and technology—among its members. An economic union represents full integration of the economies of two or more countries. In addition to eliminating internal trade barriers, adopting common external trade policies, and abolishing restrictions on the mobility of factors of production among members, an economic union requires its members to coordinate their economic policies (monetary policy, fiscal policy, taxation, and social welfare programs) in order to blend their economies into a single entity. A political union is the complete political as well as economic integration of two or more countries, thereby effectively making them one country.
11. Like the IMF, the World Bank, and the GATT, the creation of the EU was motivated by the desires of war-weary Europeans to promote peace and prosperity through economic and political cooperation. To further this objective, six European nations—France, West Germany, Italy, and the Benelux nations (Belgium, the Netherlands, and Luxembourg)—signed the Treaty of Rome in 1957. The Treaty of Rome established the European Economic Community (EEC) and called for the development of a common market among the six member states. Over the ensuing five decades, the EEC changed its name twice and expanded its membership to 25 countries. During the 1970s, the United Kingdom, Denmark, and Ireland joined the EEC, which became commonly referred to as the European Community (EC). During the 1980s, Greece, Portugal, and Spain entered the EC, bringing its membership to 12 countries. In 1993, the 12 EC members signed the Treaty of Maastricht; as a result of this agreement, the EC became known as the EU. In 1995, Austria, Finland, and Sweden joined the EU. Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, and Slovenia became EU members in 2004. Norway and Switzerland are the only major Western European nations that do not belong to the EU. Although they were invited to join, both declined for domestic political reasons.
12. The EU’s members are sovereign nations that have agreed to cede certain of their powers to the EU. The EU can be characterized both as an “intergovernmental government” (because it is a government of national governments) and as a “supranational government” (because it exercises power above the national level). The EU is governed by four organizations that perform its executive, administrative, legislative, and judicial functions: • The Council of the European Union (headquartered in Brussels, Belgium) • The European Commission (also based in Brussels) • The European Parliament (normally meets in Strasbourg, France) • The European Court of Justice (sitting in Luxembourg) . The Council of the European Union is composed of 25 representatives, each selected directly by and responsible to his or her home government. The European Commission is composed of 25 people, one from each member state, selected for five-year terms. The Commission’s primary mandate is to be the “guardian of the Treaties.” The Commission also acts as the EU’s administrative branch and manages the EU’s $130 billion annual budget. The European Parliament currently comprises 732 representatives elected in national elections to serve five-year terms. The European Court of Justice consists of 25 judges who serve six-year terms. The judges are selected jointly by the governments of the member states. The Court interprets EU law and ensures that members follow EU regulations and policies
13. The legislative process in the EU has never been simple, although it was once understandable, as captured in the catch phrase “the Commission proposes, the Parliament advises, and the Council disposes.” As the Parliament has gained increased powers, the complexity of passing legislation has increased exponentially, as Figure 10.3, which depicts decision making under the co-decision procedure , shows. The co-decision procedure is used in such areas as education, environmental protection, health, consumer policy, and free movement of workers. On issues where the co-decision process is not used, the process is simpler and the Parliament’s power is weaker.
14. EU’s Council of Ministers met in the Dutch city of Maastricht in December 1991 to discuss the EU’s economic and political future. The result was a new treaty that amended the Treaty of Rome; this new treaty was known formally as the Treaty on European Union and informally as the Maastricht Treaty . After ratification by the then 12 EU members, the Maastricht Treaty came into force on November 1, 1993. The Maastricht Treaty rests on three “pillars” designed to further Europe’s economic and political integration and these are shown in the slide. After the treaty was implemented, the European Community became commonly known as the European Union. The Maastricht Treaty granted citizens the right to live, work, vote, and run for election anywhere within the EU and strengthened the powers of the EU’s legislative body, the European Parliament, in budgetary, trade, cultural, and health matters. The treaty also created a new cohesion fund , a means of funneling economic development aid to countries whose per capita GDP is less than 90 percent of the EU average.
15. The Treaty for Europe (more popularly known as the Treaty of Amsterdam ), furthered the process of European integration. The most important components of the Treaty of Amsterdam, which was signed in 1997, include: • A strong commitment to attack the EU’s chronic high levels of unemployment, particularly among younger citizens, • A plan to strengthen the role of the European Parliament by expanding the number of areas that require use of the co-decision procedure, • Establishment of a two-track system, allowing groups of members to proceed with economic and political integration faster than the EU as a whole.
16. The Treaty of Nice , which became effective in February 2003, furthered the integration of the EU. EU officials recognized that the power and procedures of the EU’s governing bodies would have to be altered if the membership of the European Union were to be expanded. The Treaty of Nice addressed these issues. To reduce the risk of political gridlock as the number of members increased, the treaty reduced the number of areas where unanimity is required for Council approval. The number of votes assigned to each Council member in determining a qualified majority was also adjusted.
17. Every inhabited continent now contains at least one regional trading group. Europe, for example, has many other smaller trading blocs, such as the European Free Trade Association, the European Economic Area, and the Eurasian Economic Community. Trading blocs also exist in the Americas and Asia. AFTA ASEAN Free Trade Area ANCOM Andean Community APEC Asia-Pacific Economic Cooperation CACM Central American Common Market CARICOM Caribbean Community and Common Market CEMAC Monetary and Economic Community of Central Africa CER Australia–New Zealand Closer Economic Trade Relations Agreement ECOWAS Economic Community of West African States EU European Union EFTA European Free Trade Association GCC Gulf Cooperation Council MERCOSUR Southern Cone Customs Union NAFTA North American Free Trade Agreement SADC Southern African Development Community
18. In 1983 the United States established the Caribbean Basin Initiative to facilitate the economic development of the countries of Central America and the Caribbean Sea. The Caribbean Basin Initiative ( CBI ) overlaps two regional free trade areas: the Central American Common Market and the Caribbean Community and Common Market (their members are listed in Table 10.4 and shown in Map 10.2). The CBI, which acts as a unidirectional free trade agreement, permits duty-free import into the United States of a wide range of goods that originate in Caribbean Basin countries, or that have been assembled there from U.S.-produced parts. The Central America-Dominican Republic Free Trade Agreement (CAFTA-DR). This agreement among the United States, the five nations constituting Central America (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and the Dominican Republic was signed in 2004. The Mercosur Accord .  In 1991, the governments of Argentina, Brazil, Paraguay, and Uruguay signed the Mercosur Accord, an agreement to create a customs union among themselves. They agreed to establish common external tariffs and to cut, over four years, their internal tariffs on goods that account for 85 percent of intra-Mercosur trade. Andean Community .  The Andean Community resulted from a 1969 agreement to promote free trade among five small South American countries—Bolivia, Chile, Colombia, Ecuador, and Peru—to make them more competitive with the continent’s larger countries.
19. The Association of Southeast Asian Nations ( ASEAN ) was established in August 1967 to promote regional political and economic cooperation (see Map 10.3). Its founding members were Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Cambodia, Laos, Myanmar, and Vietnam joined during the 1990s.
20. Asia-Pacific Economic Cooperation ( APEC ) includes 21 countries from both sides of the Pacific Ocean (see Map 10.4). It was founded in 1989 in response to the growing interdependence of the Asia-Pacific economies. A 1994 APEC meeting in Indonesia led to a declaration committing members to achieve free trade in goods, services, and investment among members by 2010 for developed economies and by 2020 for developing economies. This objective was furthered at APEC’s 1996 meeting in Manila, where many countries made explicit pledges to reduce barriers to Asia-Pacific trade. In 2004, merchandise exports from APEC members were valued at more than $4.0 trillion and represented about 44 percent of total world merchandise exports.
21. Many African countries have also established regional trading blocs. The most important of these groups are the Southern African Development Community (SADC), the Monetary and Economic Community of Central Africa (CEMAC), and the Economic Community of West African States (ECOWAS). Although these groups were established during the 1970s and early 1980s, they have not had a major impact on regional trade. This is due to inadequate intraregional transportation facilities and the failure of most domestic governments to create economic and political systems that encourage significant regional trade. Intra-Africa trade to date accounts for less than 10 percent of the continent’s total exports.