It’s the beginning of week three in International Business and we’re discussing World Trade and Regional Economic Integration.
The notion of trade comes down to the simple fact that people from one area are able to provide goods and services that people from another area desire or need. Put simply, it is tough to find salt in the Colorado Mountains , and tough to find building-grade lumber in Florida. All it takes is a few bright individuals to realize this fact, and the basis for trade is in place: human needs. Perhaps the simplest form of trade is barter: when we trade lumber for salt for example. This system is inefficient since it requires many trading partners who have dissimilar (or complementary) needs and wants. As a result, a number of trade theories have developed over history to explain the patterns in trade that were relevant at the time.
Unfortunately, to confound every trade theory ever proposed is the human element known as “politics.” Trade theorists often work with the notion of “perfect markets;” however, we can argue readily that “perfection” is not attainable. Indeed, most theories break down quickly when governments begin to oversee and manage trade. Managing trade is often necessary and required, for example when a foreign company is overly aggressive in its pricing approach (dumping) or when governments feel that allowing a foreign competitor free entry into a market would “kill off” domestic industries (fledgling industry). There are valid reasons for government oversight of trade which generally occurs through a few limited instruments: tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies, and anti-dumping policies.
Is there a difference in the trading relationship between the USA and Canada , and the USA and Cuba? You bet! At the most basic level, Canada is a much larger and more important market (economic importance), Canadians are culturally close to Americans (cultural similarity), and Canada has long-term political relations with the USA (political stability). Cuba is exactly the opposite; so, it should not be at all surprising that the USA wants to trade more extensively with Canada.
At the most basic level of economic integration we would ask Canada to join a free trade area (or grant “most-favored nation” status) whereby both nations would agree to common internal tariff and non-tariff barriers. If things were going really well, and both partners felt that the need formalize the relationship more fully, we could move on to forming a customs union and create common external barriers to trade. If the USA and Canada ever reached the point where we chose to share “factors of production” (free movement of labor, natural resources, etc.) the two nations would be considered to be a common market. Next, we could agree to use the same currency, thereby formally linking our economies and create an economic union. Finally, we could agree to a common system of political governance, effectively becoming one country with two very strong “states,” which would create a political union. How likely is this scenario? Not very. The USA, Canada, and Mexico can't even agree to re-sign NAFTA, the most basic level of economic integration.
On the other hand, as little as 150 years ago, the United States of America had much stronger state governance than federal governance. Many countries viewed doing business in the USA as having to deal with many small countries. The Confederate Secession represents, in many ways, a very determined effort on the part of strong states to exercise their power over a weak political union. OK, not the best analogy, but it is in our history books. The European Union represents the only modern attempt at reaching political unity. As you will see, they have already achieved economic unity with the advent of the Euro.
So, what happens when two or more governments can not agree on which policies apply to which industries, or specific companies? Should they go to war? Where can they get help with mediation, and possibly even arbitration? GATT (General Agreement on Trade and Tariffs) and eventually the WTO (World Trade Organization) serve as the modern day outlets for such trade disputes. The WTO's role in overseeing trade over the past 10 years in particular has been evident and controversial. The basic premise for this week is to determine how we can ethically and fairly trade with people from other nations. Why do people trade with each other?
My assignment this week:
Understand the important implications that international trade theory holds for business practice.
Be familiar with the evolution, purpose, current status, and future prospects of the global trading system as embodied in the General Agreement on Tariffs and Trade and the World Trade Organization.
Explain the implications for business practice when governments intervene in international trade and impact the current global trading system.
Understand the implications for business that are inherent in regional economic integration agreements.
Be familiar with the history, current scope, and future prospects of the world's most important regional economic agreements including the European Union, the North American Free Trade Agreement, MERCOSUR, and Asia-Pacific Economic Cooperation.