978-0078112911 Chapter 9 Part 2

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.)

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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

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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