Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Global Business Today Ninth Edition Chapter 9
E) Opponents of NAFTA argued that jobs would be lost and wage levels would decline in the
United States and Canada, Mexican workers would emigrate north, pollution would increase due
to Mexico's more lax standards, and Mexico would lose its sovereignty.
NAFTA: The Results
F) Studies of NAFTA’s impact to date suggest that its initial effects were at best muted, and both
advocates and detractors may have been guilty of exaggeration. The most significant impact of
NAFTA may not have been economic, but rather political. The agreement has helped to create the
background for increased political stability in Mexico, however recent drug related violence is
causing some concern.
Enlargement
G) One issue now confronting NAFTA is that of enlargement. Following approval of NAFTA by
the U.S. Congress a number of other Latin American countries indicated their desire to eventually
join NAFTA. Currently the governments of both Canada and the United States are adopting a wait
and see attitude with regard to most countries.
Video Note: The video in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) Leaders Defend NAFTA Policies at Trade Summit
explores current issues for NAFTA.
Lecture Note: To extend the discussion of NAFTA, consider
{http://www.businessweek.com/articles/2013-12-30/nafta-20-years-after-neither-miracle-nor-
disaster} and {http://www.businessweek.com/articles/2012-08-01/nafta-20-years-and-not-there-yet}.
The Andean Community
H) The Andean Pact, originally formed in 1969, was based on the EU model, but was far less
successful in achieving its stated goals. By the mid-1980s, the Andean Pact had more or less
failed. However, in the late 1980s, Latin American governments began to adopt free market
economic policies, and in 1990, the Andean Pact was relaunched. The renamed Andean
Community now operates as a customs union, and in 2003, it signed an agreement with Mercosur
to restart negotiations towards the creation of a free trade area between the two trading blocs.
Teaching Tip: To see new developments with the Andean Community go to
{http://www.comunidadandina.org/endex.htm}
MERCOSUR
I) Mercosur originated in 1988 as a free trade pact between Brazil and Argentina. In 1990 it was
expanded to include Paraguay and Uruguay. In 2006, Venezuela joined the bloc. Mercosur made
some progress on reducing trade barriers between member states, however, given some fairly high
Global Business Today Ninth Edition Chapter 9
tariffs for goods from other countries, it would appear that in some industries Mercosur is trade
diverting rather than trade creating, and local firms are investing in industries that are not
competitive on a worldwide basis. Since 2010, questions have been raised as to whether the bloc
will ever become a fully functioning customs union.
Teaching Tip: For more information on Mercosur go to
{http://www.mercosur.int/msweb/Portal%20Intermediario/}.
Central American Common Market and CARICOM
J) There are two other trade pacts in the Americas: the Central American Common Market
(between Costa Rica, El Salvador, Guatemala, Honduras, the Dominican Republic, and Nicaragua)
and CARICOM (includes the English-speaking countries of the Caribbean), although neither has
made much progress as yet.
K) In 2005, an agreement was reached between the United States and the members of the Central
American Common Market. The agreement, known as the Central American Free Trade
Agreement (CAFTA), is designed to lower trade barriers between the United States and the six
countries on most goods and services.
L) In 2006, six members of CARICOM established the Caribbean Single Market and Economy
(CSME) with the goal of lowering trade barriers, and harmonizing macro-economic and monetary
policy between member states.
Free Trade of the Americas
M) In April 1998, 34 heads of state traveled to Santiago, Chile for the second summit of the
Americas where they formally inaugurated talks to establish a FTAA (Free Trade of The
Americas) by 2005. While an agreement was not reached, the continuing talks have addressed a
wide range of economic, political, and environmental issues related to cross-border trade and
investment.
N) At the moment, there are two major stumbling blocks preventing an agreement. First, the
United States wants the southern countries to agree to tougher enforcement of intellectual property
rights and lower manufacturing tariffs. Second, Brazil and Argentina want the United States to
reduce agricultural subsidies, and eliminate tariffs on agricultural imports.
O) If the FTAA is established, it will have major implications for cross-border trade and
investment flows within the hemisphere. The FTAA would create a free trade area of over 850
million people who accounted for $18 trillion in GDP in 2008.
Teaching Tip: Additional information on the Free Trade of the Americas can be found at
{http://www.ftaa-alca.org/alca_e.asp}.
Global Business Today Ninth Edition Chapter 9
Lecture Note: To extend this discussion, consider exploring the proposed Trans-Pacific
Partnership. To learn more, go to {http://www.businessweek.com/articles/2012-05-31/rushing-to-finish-
a-global-free-trade-deal#r=lr-fs}
Video Note: To extend this discussion, consider {http://www.businessweek.com/videos/2013-11-
07/trans-pacific-partnership-is-on-track-amb-dot-carden}.
REGIONAL ECONOMIC INTEGRATION ELSEWHERE
A) There have been numerous attempts at regional economic integration throughout Asia and
Africa. Few efforts however, have made much progress.
Association of Southeast Asian Nations
B) Formed in 1967, the Association of Southeast Asian Nations (ASEAN) currently includes
Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand,
and Vietnam (see Map 9.3 in the text). The basic objectives of ASEAN are to foster freer trade
between member countries and to achieve some cooperation in their industrial policies.
C) In 2003, an ASEAN Free Trade Area (AFTA) between the six original members of ASEAN
came into effect. Vietnam, Laos, Myanmar, and Cambodia joined later. The goal of AFTA is to
reduce import tariffs among the six original members by 2010 and for the newer members by
2015. In 2010, ASEAN signed a new free trade agreement with China to remove tariffs on 90
percent of traded goods.
Asian Pacific Economic Cooperation (APEC)
D) The Asia-Pacific Economic Cooperation (APEC) currently has 21 members including such
economic powerhouses as the United States, Japan, and China. The stated aim of APEC is to
increase multilateral cooperation in view of the economic rise of the Pacific nations and the
growing interdependence within the region.
Teaching Tip: For more information on APEC, go to {http://www.apec.org/}.
Regional Trade Blocs in Africa
E) There are nine trade blocs on the African continent however progress toward the establishment
of meaningful trade blocs has been slow.
FOCUS ON MANAGERIAL IMPLICATIONS
A) The most significant developments in regional economic integration are occurring in the EU
and NAFTA. These developments have the most profound and immediate implications for
business practice.
Opportunities
B) Creation of a single market offers significant opportunities because markets that were formerly
protected from foreign competition are opened.
C) The greatest implication for MNEs is that the free movement of goods across borders, the
harmonization of product standards, and the simplification of tax regimes, makes it possible for
them to realize potentially enormous cost economies by centralizing production in those locations
where the mix of factor costs and skills is optimal. By specialization and the shipping of goods
between locations, a much more efficient web of operations can be created.
D) On the other hand, even after the removal of barriers to trade and investment, enduring
differences between nations in culture and competitive practices often limit the ability of
companies to realize cost economies by centralizing production in key locations and producing a
standardized product for a single multi-country market.
Threats
F) Just as the emergence of single markets in the EU and North America creates opportunities for
business, it also presents a number of threats. For one thing, the business environment within both
groups will become more competitive. A further threat to non-EU and/or non-North American
firms arises from the likely long-term improvements in the competitive position of many European
and North American companies.
G) Another threat to firms outside of trading blocks is the threat of being shut out of the single
market by the creation of a “trade fortress.” Finally, firms may be limited in their ability to pursue
the strategy of their choice in the EU as the EU increases its willingness and ability to intervene
and impose conditions on companies proposing mergers and acquisitions.
Critical Thinking and Discussion Questions
1. NAFTA has produced significant net benefits for the Canadian, Mexican, and U.S. economy.
Discuss.
Global Business Today Ninth Edition Chapter 9
2. What are the economic and political arguments for regional economic integration? Given these
arguments, why don’t we see more substantial examples of integration in the world economy?
3. What in general was the effect of the creation of a single market and a single currency within the
EU on competition within the EU? Why?
4. Do you think it is correct for the European Commission to restrict mergers between American
companies that do business in Europe? (For example, the European Commission vetoed the
proposed merger between WorldCom and Sprint, both U.S. companies, and it carefully reviewed
the merger between AOL and TimeWarner, again both U.S. companies.)
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
179
5. What were the causes of the 2010-2012 sovereign debt crisis in the EU? What does this crisis
tell us about the weaknesses of the euro? Do you think the euro will survive the sovereign debt
crisis?
6. How should a U.S. firm that currently only exports to ASEAN countries respond to the creation
of a single market in this regional grouping?
7. How should a firm that has self-sufficient production facilities to in several ASEAN countries
respond to the creation of a single market? What are the constraints on its ability to respond in a
manner that minimizes production costs?
8. After a promising start, in the last few years, Mercosur, the major Latin American trade
agreement, has faltered and made little progress since 2000. What problems are hurting Mercosur?
What can be done to solve these problems?
9. Would the establishment of a Free Trade Area of the Americas (FTAA) be good for the two
most advanced economies of the hemisphere, the United States and Canada? How might the
establishment of the FTAA impact the strategy of North American firms?
Closing Case: I Want my Greek TV!
Summary
The closing case explores the fallout from a recent ruling by the European Court of Justice on the
rights of companies like Sky Broadcasting Corporation to limit local viewing options for
consumers. Prior to the ruling Sky Broadcasting and ESPN had exclusive rights to show
broadcasts of English Premier League soccer matches. Under the agreements, the companies
divided the European market into segments and charged consumers different prices in each market.
The ruling now gives consumers the right to access cheaper broadcasts being shown in other
European Union markets. The Court defends the ruling arguing that it upholds the basic principles
of a single market system. Discussion of the case can revolve around the following questions.
QUESTION 1: Why do you think the English Premier League has historically charged different
prices for broadcasting rights in different European markets?
Global Business Today Ninth Edition Chapter 9
QUESTION 2: Do you think the European Court of Justice was right to rule that the league could
not stop people from buying Premier League soccer feeds from other countries? Explain your
reasoning?
QUESTION 3: Who benefits from the EU ruling? Who will the losers be?
QUESTION 4: If you were running the English Premier League, what would your strategy be on
broadcast rights going forward?
Global Business Today Ninth Edition Chapter 9
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
182
rise as clubs try to recoup some of the revenues they will lose as a result of the ruling. Regardless
of what the organization ultimately chooses do however, many students will probably note that the
ruling will probably have longer-term implications as it establishes a guideline for similar
situations in the future. Students may note for example, that the European Commission appears to
be determined to truly create a single market, and the ruling on soccer broadcasts could be carried
over to pricing in other markets as well.
Lecture Note: To extend this discussion, consider {http://www.bbc.co.uk/news/business-
15162241}, {http://www.bbc.co.uk/news/business-11452434}, and
{http://www.bbc.co.uk/news/business-12355022}.
Continuous Case Concept
A major point of contention in the KOREU Free Trade agreement that went into effect in 2011
between South Korea and the European Union was its impact on the auto industry, and especially
on South Korean automakers. Hyundai Motor India for example, was worried that competition
from its parent company could threaten sales in Europe. Europe is one of India’s largest export
markets for cars, and Hyundai Motor India relies on the market for over half of its sales.
• Ask students to consider the implications of trade agreements like the one between South
Korea and the European Union. How can companies avoid being shut out of large markets
like the European Union? Hyundai Motor India claimed that it would be virtually
impossible for it to compete in Europe if the free trade agreement were implemented.
• Next, consider the benefits for companies like Hyundai of operating in the European Union
or NAFTA countries instead of individual markets. How does a single market environment
affect issues such as product pricing, or the location of manufacturing? Should Hyundai
Motor India consider shifting production to Europe?
• Finally, while most of the world’s major players in the auto industry already have a
presence in both North America and the European Union, consider what a common set of
external trade policies means to companies like Hyundai Motor India that want to enter
these markets. How does it affect the cost and choice of entry mode? What does it mean
in terms of risk?
This Continuous Case Concept works well after students have been introduced to the notion of
economic integration, and understand the advantages and disadvantages of membership in a trade
bloc.
Global Business Today Ninth Edition Chapter 9
globalEDGE Exercises
The resources for each exercise can be easily located by using the search box at the top of the
globalEDGE website at http://globalEDGE.msu.edu
Exercise 1
Search phrase: Regional Trade Agreements
Resource Name: World Trade Organization: Regional Trade Agreements
Website: http://www.wto.org/english/tratop_e/region_e/region_e.htm
globalEDGE Category: Regional Trade Agreements
Additional Info:
The Regional Trade Agreements page of the WTO provides a lot of background and analysis on
RTA’s around the world. To access individual agreements, one has to enter the “RTA Database”
following a link on this page. You can also access Maps of RTAs by Country to see the
agreements for each country.
Exercise 2
Search phrase: COMESA
Resource Name: COMESA: Introduction
Website: http://globaledge.msu.edu/trade-blocs/comesa/
globalEDGE Category: Trade Blocs: COMESA
Additional Info:
The Common Market for Eastern and Southern Africa (COMESA) is a free trade area that
encompasses 19 countries stretching from Libya to Zimbabwe. The Trade Blocs section of
globalEDGE provides information on the history and objectives of the trade bloc, as well as its
member states.
Additional Readings and Sources of Information
At 20 years, NAFTA Didn’t Close Wage Gap
http://www.businessweek.com/ap/2013-12-31/at-20-years-nafta-didnt-close-wage-gap
Argentina to Import Brazilian Tomatoes to Protect New Price Caps
http://www.businessweek.com/news/2014-01-08/argentina-to-import-brazilian-tomatoes-to-
protect-new-price-caps
Why Wal-Mart Just Gave a Raise to Tomato Pickers
http://www.businessweek.com/articles/2014-01-21/why-wal-mart-just-gave-a-raise-to-tomato-
pickers
Global Business Today Ninth Edition Chapter 9
Big Tobacco’s Pacific-Trade Pact Fight
http://www.businessweek.com/articles/2013-11-14/2014-outlook-big-tobaccos-pacific-trade-pact-
fight
Europe Must Focus on Value Creation
http://www.businessweek.com/globalbiz/content/apr2010/gb20100415_271686.htm
The Greeks Head for a Scary Meeting with the Germans
http://www.businessweek.com/articles/2012-08-20/the-greeks-head-for-a-scary-meeting-with-the-
germans
New Balance Wants Its Tariffs. Nike Doesn't
http://www.businessweek.com/articles/2012-05-03/new-balance-wants-its-tariffs-dot-nike-
doesnt#r=lr-fst
Could Better Labels Shrink the Trade Deficit?
http://www.businessweek.com/articles/2012-04-19/could-better-labels-shrink-the-trade-
deficit#r=lr-fst
Now it’s a European Banking Crisis
http://www.businessweek.com/magazine/content/10_19/b4177011719842.htm
European Monetary Fund to Launch by January
http://www.businessweek.com/globalbiz/content/mar2010/gb2010039_054891.htm
Greek Crisis Highlight’s Turkey’s Strength
http://www.businessweek.com/globalbiz/content/mar2010/gb20100326_199869.htm
