International Trade Alliances

One of the most visible changes in the international business environment in recent years has been the development of regional trading alliances and international  trade agreements. These developments are significantly  shaping global trade.

1. GATT  AND THE WORLD TRADE ORGANIZATION

The General Agreement on Tariffs and Trade (GATT),  signed by 23 nations in 1947, started  as a set of rules to ensure nondiscrimination, clear procedures, the negotiation of disputes, and the participation  of lesser-developed countries in international trade. GATT and its successor, the World Trade Organization (WTO), primarily use tariff concessions as a tool to increase trade. Member  countries agree to limit the level of tariffs they will im- pose on imports from other members. The most favored nation clause calls for each member country to grant to every other member country the most favorable treatment it accords to any country with respect to imports and exports.44

GATT  sponsored eight rounds of international  trade negotiations aimed at reducing trade restrictions. The 1986 to 1994 Uruguay Round (the first to be named for a develop- ing country) involved 125 countries and cut more tariffs than ever before. The Round’s multilateral trade agreement, which  took effect January 1, 1995, was the most comprehen- sive pact since the original  1947 agreement. It boldly moved the world closer to global free trade by calling for establishment of the WTO. The WTO represents the maturation of GATT  into a permanent  global institution that can monitor international  trade and has legal authority to arbitrate disputes on some 400 trade issues. As of December 11, 2005, 149 countries were members of the WTO.45

The goal of the WTO is to guide—and sometime urge—the nations of the world toward free trade and open markets.46  The WTO encompasses the GATT  and all its agreements, as well  as various other agreements related to trade in services and intellectual property issues in world trade. As a permanent membership  organization,  the WTO  is bringing greater trade liberalization in goods, information,  technological developments, and services; stron- ger enforcement of rules and regulations; and more power to resolve disputes. The power of the WTO, however, is partly responsible for a growing  backlash against global trade. An in- creasing number of individuals  and public interest groups are protesting  that global trade locks poor people into poverty and harms wages, jobs, and the environment.

2. EUROPEAN UNION

Formed in 1957 to improve economic and social conditions among its members, the Euro- pean Economic  Community, now called the European Union (EU), has grown to the

25-nation alliance illustrated in Exhibit 3.6. The biggest expansion came in 2004, when the EU welcomed 10 new members from southern and eastern Europe:  Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. In addition,  Bulgaria, Romania, and Turkey have opened membership negotiations. A treaty signed in early 2003 formalized new rules and policies to ensure that the EU can continue to function efficiently with 25 or more members.47

Another aspect of significance to countries operating globally is the European Union’s monetary revolution and the introduction of the euro. In January 2002, the euro, a single European currency, replaced national currencies in 12 member countries and unified  a huge marketplace, creating a competitive  economy second only to the United States.48 Belgium, Germany, Greece, France, Spain, Italy, Ireland, the Netherlands, Austria, Finland, Portugal, and Luxembourg traded their deutschemarks, francs, lira, and other currencies to adopt the euro, a currency  with a single exchange rate. The United Kingdom thus far has refused to accept the euro, in part because of a sense of nationalism, but many believe that the United Kingdom and new EU members eventually will adopt the currency.

The implications of a single European currency are enormous, within as well  as outside Europe.  Because it potentially  replaces up to 25 European domestic currencies, the euro will affect legal contracts, financial management, sales and marketing tactics, manufactur- ing, distribution, payroll, pensions, training,  taxes, and information management systems. Every corporation that does business in or with EU countries will feel the impact.49 In ad- dition, the EU is likely to speed deregulation, which already has reordered Europe’s corpo- rate and competitive landscape.

3. NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)

The North American  Free Trade Agreement, which went into effect January 1, 1994, merged the United States, Canada,  and Mexico into a mega market  with more than 421 million consumers. The agreement breaks down tariffs and trade restrictions on most agricultural  and manufactured products over a 15-year period. The treaty built on the 1989 U.S.–Canada  agreement and was  intended to spur growth and investment,  increase exports, and expand jobs in all three nations.50

Between 1994 and 2004, U.S. trade with Mexico  increased more than threefold,  while trade with Canada also rose dramatically.51 NAFTA spurred the entry of small businesses into the global arena. Jeff Victor, general manager of Treatment Products, Ltd., which makes car cleaners and waxes, credits NAFTA for his surging export volume. Prior to the pact, Mexican tariffs as high  as 20 percent  made it impossible for the Chicago-based com- pany to expand its presence south of the border.52

On the tenth anniversary of the agreement in January 2004, opinions concerning the benefits of NAFTA seemed to be as divided as they were when  talks began. Some people call it a spectacular  success, and others  brand  it as a dismal failure.53 Although NAFTA has not lived up to its grand expectations,  experts stress that it increased trade, investment,  and income and continues to enable companies in all three countries to compete more effec- tively with rival Asian and European firms.54

4. THE GLOBALIZATION BACKLASH

As the world becomes  increasingly   interconnected,   a  backlash  over globalization  is occurring. Perhaps the first highly visible antiglobalization protest took place at the meeting of the World Trade Organization (WTO)  in Seattle, Washington,  in the fall of 1999, where business and political leaders were caught off guard by the strong sentiments. Since then, protesters have converged on both the International Monetary Fund (IMF) and the World Bank. These three organizations  sometimes are referred to as the Iron Triangle of globalization.

A primary concern is the loss of jobs as companies  expand their offshoring activities by exporting more and more work to countries with lower wages.55 Consider,  for example, that a 26-year-old  engineer in Bangalore, India, designs next-generation mobile phone chips at a Texas Instruments research center for a salary of $10,000 a year. Boeing used aeronautical specialists in Russia to design luggage bins and wing parts for planes. These people make about  $650  a month, compared to counterparts in the United States making $6,000  a month. IBM shifted thousands of high-paying programming jobs to cheap-labor sites in China, India, and Brazil.56

The transfer of jobs such as making  shoes, clothing,  and toys began two decades ago. Today,  services and knowledge  work are rapidly  moving  to developing countries. Outsourc- ing of white-collar jobs to India jumped 60 percent in 2003 compared to the year before. An analyst at Forrester Research Inc. predicts that at least 3.3 million mostly white-collar jobs and $136 billion in wages will shift from the United  States to low-wage countries by 2015.57

Activists  charge that globalization not only hurts people who lose their jobs in the United States but also contributes  to worldwide environmental destruction and locks poor people in developing nations into a web of poverty and suffering.58 Political leaders struggle to assure the public of the advantages of globalization  and free trade,59 with President George W. Bush admonishing those who oppose globalization  as “no friends to the poor.” Business leaders, meanwhile,  insist that the economic benefits flow back to the U.S. economy in the form of lower prices, expanded markets, and increased profits  that can fund innovation.60

Yet, the antiglobalization fervor keeps getting hotter—and is not likely to dissipate any time soon. Managers who once saw antiglobalists as a fringe  group are starting  to pay at- tention to their growing  concerns. In the end, it is not whether globalization is good or bad, but how business and government  can work together to ensure that the advantages of a global world  are shared fully and fairly.

Source: Daft Richard L., Marcic Dorothy (2009), Understanding Management, South-Western College Pub; 8th edition.