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CHAPTER 10
International Cooperation Among Nations
Chapter Objectives
After studying this chapter, students should be able to:
2. Contrast the different forms of economic integration among cooperating
countries.
4. Describe the other major trading blocs in today’s world economy.
LECTURE OUTLINE
OPENING CASE: Trade and Prosperity: The Case of Mexico
The opening case examines Mexico’s recent economic development and concludes that
Mexico’s success is based on its openness to international trade and investment.
Key Points
• From 1917 to 1982, Mexico relied on inward-looking economic policies such as high
tariffs, restrictions on FDI, and government ownership of business.
• The last four Mexican presidents have reversed these policies by lowering tariffs,
privatization, encouraging FDI, and joining the GATT and WTO.
• Mexico’s participation in NAFTA and recent agreement with the EU further opened
its economy to the outside world.
• Many industries in Mexico are now booming. However, China’s joining the WTO (and
increasing attractiveness to foreign investors) and a slowdown in the U.S. economy
in 2001 slowed Mexico’s export surge.
• Mexico’s officials recognize the need to increase labor productivity.
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CHAPTER SUMMARY
Chapter 10 explores how nations cooperate to minimize trade restrictions. The chapter
begins with a discussion of the General Agreement on Tariffs and Trade, and then
examines economic integration and other types of regional trading blocs.
THE GENERAL AGREEMENT ON TARIFFS AND TRADE AND THE WTO
The General Agreement on Tariffs and Trade (GATT) is a multilateral treaty designed to
minimize trade barriers. GATT went into effect in 1948. It provided a forum for trade
The Role of the General Agreement on Tariffs and Trade PP 10-4
• The goal of GATT was to promote a free and competitive trading environment that
benefits efficient producers. To that end, GATT sponsored international
negotiations, called “rounds,” to reduce trade barriers (both tariff and nontariff).
GATT successfully oversaw a reduction of tariffs from an average of over 40 percent
in 1948 to approximately 3 percent today, and promoted a dramatic increase in world
trade. Discuss Table 10.1 here.
BRINGING THE WORLD INTO FOCUS
Most Nations Are Favored
Though not required to do so, WTO member countries often grant MFN status to
countries not belonging to the WTO. In the U.S., only a few countries (such as Cuba
and North Korea) are excluded. The Clinton administration changed the term “Most
Favored Nation” (MFN) to “Normal Trade Relations” (NTR).
• PP 10-7 There are two exceptions to the MFN clause. First, in an effort to assist
poorer nations with economic development, GATT permits nations to lower tariffs to
developing countries without lowering them for more developed countries. For
example, the U.S. follows the Generalized System of Preferences (GSP) code to
offer developing nations reduced tariffs. Second, regional agreements promoting
economic integration, such as the EU or NAFTA, are exempt from the MFN clause.
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The World Trade Organization
• The World Trade Organization (WTO) was founded in 1995, and is comprised of 153
member countries and 30 observer countries. The WTO has three primary goals: to
promote trade flows by encouraging nations to adopt non-discriminatory and
predictable trade policies, to reduce remaining trade barriers through multilateral
negotiations, and to establish impartial procedures for resolving trade disputes
among members. Discuss Figure 10.1 here.
• PP 10-11 Problem Sectors. One challenge facing the WTO is dealing with sectors
of the economy such as agriculture and textiles that most nations protect. Groups
• The General Agreement on Trade in Services (GATS). The WTO is also focusing
on reducing barriers to trade in services. One approach currently in use is the
principle of national treatment, in which a country treats foreign firms the same as it
treats domestic firms. The WTO began negotiating a new GATS agreement in 2000,
but progress has been slow.
• Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
The third challenge for the WTO is intellectual property rights (patents, copyrights,
trademarks, and brand names). Efforts, agreed upon at the Uruguay round, to
improve intellectual property rights protection have largely failed due to lax
enforcement by certain countries.
REGIONAL ECONOMIC INTEGRATION
Forms of Economic Integration
Countries are seeking to integrate their economies to open new markets for their
businesses and lower prices for their consumers. There are five types of regional
economic integration between countries.
1. Free Trade Area
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• A free trade area eliminates all barriers to trade among member countries, but
allows each country to establish its own external trade barriers. The North
2. Customs Union
• A customs union combines the elimination of barriers to internal trade among
3. Common Market
• A common market combines the elements of a customs union with a policy that
4. Economic Union
• An economic union eliminates trade barriers between member countries,
5. Political Union
• A political union combines the elements of an economic union with the added
The Impact of Economic Integration on Firms
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• Regional economic integration has both advantages and disadvantages for
businesses. On the positive side, because the elimination of trade barriers among
member countries opens up new markets, firms can gain scale economies from
Teaching Note:
Most students are aware of some of the controversy surrounding the
North American Free Trade Agreement. Instructors may wish to
create a debate situation in which students are asked to play the role of an American
worker who has lost his job to a Mexican worker.
THE EUROPEAN UNION PP 10-15
• The European Union (EU) is the most important trading bloc in the world today. 27
countries currently “belong” to the EU, making it the world’s richest market, with a
total GDP of $14.4 trillion. Discuss Table 10.2 here.
• The European Economic Community (EEC) was established at the Treaty of Rome
Governing the European Union
• The EU is governed by four organizations. The Council of the Economic Union,
made up of 27 members, each of whom is responsible to his or her home
government, is the EU’s main decision-making body. Because of its composition,
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BRINGING THE WORLD INTO FOCUS
Three Majorities Are Better Than One
The Treaty of Nice requires that a qualified majority can be obtained only if three
conditions (the so-called “triple majority”) are met: (1) the decision receives 73.9
percent of the votes cast by Council members; (2) a majority of the member states
approve the decision; and (3) the decision is approved by members who represent at
least 62 percent of the EU’s population.
• The Legislative Process. The legislative process in the EU, which is usually
The Struggle to Create a Common Market
• As a result of pressures from domestic special interest groups, the process of
transforming the members of the EU into a common market was a slow one. Even
through the 1980s, firms doing business within the area had to comply with 12
different sets of national laws and regulations. The text provides several examples
of the regulations followed by different members of the EU.
• Initially, the EU relied on a process of harmonization (whereby the EC encouraged
VENTURING ABROAD
Lobbying the European Union
This box discusses how firms can influence EU decision makers in their legislative
actions. EU decision makers have the difficult job of juggling the diverse interests of
From Common Market to Economic Union
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• Many Europeans have argued for further integration, suggesting that the EU become
an economic union. To that end, the Treaty on European Union (also known as the
Maastricht Treaty) was reached in 1991. The treaty came into force in 1993.
• During a three-year transition period, the euro existed only as a bookkeeping
currency. Actual euro coins and currency were put into circulation at the beginning
of 2002.
• The ultimate goal of the EU, the creation of a single EU currency, implies that
countries lose their ability to control their own domestic monetary supplies and
Future EU Challenges. Other conflicts continue to be waged within the EU. For example,
state aid to industry has been of particular concern to members. While the EU prohibits
national governments from making subsidies that result in a distortion of competition,
many governments still assist domestic companies that are in danger of bankruptcy.
OTHER REGIONAL TRADING BLOCS
The success of the EU in enriching its members has spawned the development of new
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The North American Free Trade Agreement
• The North American Free Trade Agreement (NAFTA) was implemented in 1994 to
reduce barriers to trade and investment among Canada, Mexico, and the United
States. The agreement was built upon a trade agreement that had been signed
between the U.S. and Canada six years earlier and upon the extensive amount of
trade that already existed among the three countries. The agreement will be phased
in over a 15-year period.
• Trade negotiators also made an effort to prevent the establishment of screwdriver
plants (factories in which very little transformation of the product is undertaken) in
Mexico as a means of evading U.S. and Canadian tariffs by developing detailed rules
Other Free Trade Agreements in the Americas
• Other free trade agreements are currently being negotiated. Mexico in particular has
been active in that respect, negotiating an agreement with Chile, an agreement with
Venezuela and Colombia, and an agreement with five of its Central American
neighbors.
• The Caribbean Basin Initiative (CBI) to facilitate the economic development of the
nations of Central America and the Caribbean Sea was initiated by the U.S. in 1983.
• The Central America-Dominican Republic Free Trade Agreement (CAFTA-DR)
was signed by the U.S., Costa Rica, El Salvador, Guatemala, Honduras, and
Nicaragua in 2004.
• The Mercosur Accord is an agreement among Argentina, Brazil, Paraguay, and
Uruguay to cut internal tariffs and establish common external tariffs. The agreement
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while others fear an influx of cheaply made products will make it more difficult to
compete.
• The Andean Community was established in 1969 to promote free trade among
Bolivia, Chile, Colombia, Ecuador, and Peru. The objective of the agreement was to
Trade Arrangements in the Asia-Pacific Region
• The Australia-New Zealand Agreement. The Australia-New Zealand Closer
Economic Relations Trade Agreement (known as CER) took effect in 1983. Its
goal is to expand trade and straighten links in a diverse set of areas including
investment, marketing, tourism, and transport. Most analysts agree that it has been
highly successful.
• The Association of South East Asian Nations (ASEAN) was founded in 1967 by
Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand to promote
regional political, and economic cooperation. The ASEAN Free Trade Area was
established to promote intra-ASEAN trade.
• The Asia-Pacific Economic Cooperation (APEC), started in 1989, is the primary
regional vehicle for promoting open trade and practical economic cooperation.
African Initiatives
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• 10 African nations created the South African Development Coordination
Conference (SADCC) in 1980 to promote the development of their regional
economy. It also has plans to develop a regional common market.
CHAPTER REVIEW
1. What does most favored nation (MFN) mean?
2. Under what conditions can WTO members not use MFN when dealing with one another?
3. How does the WTO differ from GATT?
4. How do the various forms of economic integration differ?
There are five forms of regional economic integration. A free trade area eliminates all
barriers to trade among member countries, but allows each member to establish its own
5. Why do free trade areas develop rules of origin?
6. What was the goal of the Treaty of Rome?
7. Describe the four major organizations governing the EU.
The Council of the European Union, made up of representatives of each member country, is
the EU’s main decision-making body, and because of its composition, reflects the desires of
8. What are NAFTA’s major provisions?
9. What is the Caribbean Basin Initiative? What is its goal?