Chapter 3 Regional Market Characteristics and Preferential Trade Agreements SUMMARY A. This chapter examines the environment for world trade, focusing on the institutions and regional cooperation agreements that affect trade patterns. B. The multilateral World Trade Organization, created in 1995 as the successor to the General Agreement on Tariffs and Trade, provides a forum for settling disputes among member nations and tries to set policy for world trade. C. The world trade environment is also characterized by preferential trade agreements among smaller numbers of countries on a regional and subregional basis. These agreements can be conceptualized on a continuum of increasing economic integration. D. Free trade areas such as the one created by the North American Free Trade Agreement (NAFTA) represent the lowest level of economic integration. E. The purpose of a free trade agreement is to eliminate tariffs and quotas. Rules of origin are used to verify the country from which goods are shipped. A customs union, such as Mercosur, represents a further degree of integration in the form of common external tariffs. F. In a common market such as Central American Integration System (SICA), restrictions on the movement of labor and capital are eased in an effort to further increase integration. G. An economic union, such as the European Union (EU), the highest level of economic integration is achieved by unification of economic policies and institutions. Harmonization, the coming together of varying standards and regulations, is a key characteristic of the EU. H. Other important cooperation arrangements include the Association of Southeast Asian Nations (ASEAN), the Cooperation Council for the Arab States of the Gulf (GCC). In Africa, the two main cooperation agreements are the Economic Community of West African States (ECOWAS) and the South African Development Community (SADC). LEARNING OBJECTIVES 1 Explain the role of the World Trade Organization in facilitating global trade relations among nations 2 Compare and contrast the four main categories of preferential trade agreements 3 Explain the trade relationship dynamics among signatories of NAFTA 4 Identify the four main preferential trade agreements in Latin America and the key members of each 5 Identify the main preferential trade agreement in Asia 6 Understand the rationale for the creation of both the European Union and the euro zone 7 Describe the activities of the key regional organization in the Middle East 8 Explain the issues for global marketers wishing to expand in Africa DISCUSSION QUESTIONS 3-4. Explain the role of the World Trade Organization. Why has the Doha Round of trade talks stalled? Answer: The World Trade Organization (WTO) is the successor to GATT. Based in Geneva, the WTO has a dispute-settlement body (DSB), representing all member countries, that mediates trade complaints concerning unfair trade barriers and other issues. During a 60-day consultation period, parties to a complaint are expected to engage in good-faith negotiations and reach amicable resolution of a given issue. Failing that, the complainant can ask the DSB to appoint a three-member panel to hear the case. After convening, the panel has nine months within which to issue its ruling. The DSB is empowered to act on the panel’s recommendations. The losing party to a dispute can turn to the seven-member appellate body. If a country’s trade policies are found to violate WTO rules, it is expected to change those policies and negotiate compensation via lower tariffs with the winning country. If appropriate changes and compensation are not forthcoming, the WTO can authorize trade sanctions against the loser. 3-5. Describe the similarities and differences between a free trade area, a customs union, a common market, and an economic union. Give an example of each. Answer: All four forms of economic integration eliminate tariffs and quotas among member nations. At the next level, customs unions, common markets, and economic unions all have common external tariff and quota systems. Common markets and economic unions provide for reducing or eliminating restrictions on people, money, and other factors. An economic union is the most highly evolved form of integration, calling for harmonization of economic policies and institutions. Examples include: free trade area – NAFTA; customs union – EU; common market – Central American Common Market (CACM); economic union – EU. 3-6. What are the criteria for joining the euro zone? Answer: The objective of the EU is to harmonize national laws and regulations so that goods, services, people, and eventually money can flow freely across national borders. Members in the euro zone – Austria, Belgium, Finland, Ireland, the Netherlands, France, Germany, Italy, Luxembourg, Portugal, and Spain all use a single currency called the Euro. 3-7. Identify a regional economic organization or agreement in each of the following areas: Latin America, Asia/Pacific, Western Europe, Central Europe, The Middle East, and Africa. Answer: Three important trade agreements in Latin America are the Central American Integration System (SICA), Andean Group, and Southern Cone Common Market (Mercosur). The Asia/Pacific region is home to the Association of Southeast Asian Nations (ASEAN). The European Union (EU) and European Economic Area (EEA) are the important trading blocs in Western Europe. Further east, the new Central Cooperation Council (GCC) dates back to 1981; newer agreements include the Arab Cooperation Council (ACC) and Arab Maghreb Union Economic Community of West African States (ECOWAS). Elsewhere on the continent, the ten-nation South African Development Coordination Conference (SADCC) has existed since 1980. 3-8. Several key dates mentioned in the chapter are listed here. Can you identify the event associated with each? Answer: 1. 1492: Christopher Columbus reaches the Americas, marking the beginning of European exploration and colonization in the New World. 2. 1776: The Declaration of Independence is signed, leading to the American Revolution and the founding of the United States. 3. 1861-1865: The American Civil War takes place, resulting in the end of slavery and significant changes in U.S. economic and social structures. 4. 1914-1918: World War I occurs, reshaping international relations and economies globally. 5. 1929: The Great Depression begins with the stock market crash, causing widespread economic hardship and influencing global financial policies. 6. 1945: World War II ends, leading to the establishment of the United Nations and the beginning of the Cold War. 7. 1971: The U.S. abandons the gold standard, leading to the era of floating exchange rates and significant changes in global finance. OVERVIEW Global trade talks have been taking on a distinctly bicoastal character lately. Looking east and west across the Pacific Ocean, the United States and several Asian countries are hammering out the details of a trade framework known as the Trans-Pacific Partnership (TPP). The goal is an ambitious one: to create a free trade area that will lead to long-term economic growth. ANNOTATED LECTURE/OUTLINE THE WORLD TRADE ORGANZIATION AND GATT • (Learning Objective #1) The year 2012 marks the 65th anniversary of the General Agreement on Tariffs and Trade (GATT), a treaty among nations whose governments agree, at least in principle, to promote trade among members. The General Agreement on Tariffs and Trade (GATT) was treaty among nations whose governments agreed to promoted trade among members. GATT was intended to be a multilateral, global initiative which liberalized world trade and handled 300 disputes over fifty years; however, GATT lacked enforcement power. The successor to GATT, the World Trade Organization (WTO), born on January 1, 1995, provides a forum for trade-related negotiations among its 157 members and mediates trade disputes. The Dispute Settlement Body (DSB) mediates complaints concerning unfair trade barriers; during a 60-day consultation period, parties engage in good-faith negotiations (see Table 3 -1). Failing that, the DSB convenes a panel and acts on the panel’s recommendations; if after due process, the losing party violates WTO rules, the WTO can impose trade sanctions. WTO trade ministers meet annually to work on improving world trade, but politicians in many countries resist the WTO’s plans to move swiftly in removing trade barriers. The current round of WTO negotiations began in 2001; the talks collapsed in 2005, and attempts to revive them in the years since have not been successful. That is one reason why the Trans-Atlantic Partnership Agreement (TAPA) and the Trans-Pacific Partnership (TPP) negotiations are moving ahead. PREFERENTIAL TRADE AGREEMENTS • (Learning Objective #2) The WTO promotes free trade on a global basis; in addition, countries in each of the world's regions are seeking to liberalize trade within their regions. A preferential trade agreement is a mechanism that confers special treatment on select trading partners. By favoring certain countries, such agreements frequently discriminate against others. Free Trade Area A free trade area (FTA) is formed when two or more countries agree to eliminate tariffs and other barriers that restrict trade. A free trade area comes into being when trading partners successfully negotiate a free trade agreement (also abbreviated FTA), the ultimate goal of which is zero duties on goods that cross borders between the partners. Rules of origin are used to discourage the importation of goods into the member country with the lowest external tariff for transshipment to one or more FTA members with higher external tariffs. To date, dozens of free trade agreements, many of them bilateral, have been successfully negotiated. Customs Unions A customs union represents the logical evolution of a free trade area. In addition to eliminating internal barriers to trade, members of a customs union agree to the establishment of common external tariffs (CETs). Some of the customs unions discussed in this chapter are the Andean Community, the Central American Integration System (SICA), Mercosur, and CARICOM. Common Market A common market is the next level of economic integration. In addition to the removal of internal barriers to trade and the establishment of common external tariffs, the common market allows for free movement of factors of production, including labor and capital. Economic Union An economic union builds upon the elimination of the internal tariff barriers, the establishment of common external barriers, and the free flow of factors. It seeks to coordinate and harmonize economic and social policies within the union to facilitate the free flow of capital, labor, goods, and services from country to country. The full evolution of an economic union would involve the creation of a unified central bank, the use of a single currency, and common policies on agriculture, social services and welfare, regional development, transport, taxation, competition, and mergers. A true economic union requires extensive political unity, which makes it similar to a nation. The further integration of nations that were members of fully developed economic unions would be the formation of a central government that would bring together independent political states into a single political framework. The European Union is approaching its target of completing most of the steps required to become a full economic union. NORTH AMERICA • (Learning Objective #3) North America, which includes Canada, the United States, and Mexico, comprises a distinctive regional market. The U.S. has more industry leaders than any other nation, dominating the computer, software, aerospace, entertainment, medical equipment, and jet engine industry sectors. The U.S.-Canada Free Trade Area (CFTA) came into existence in 1989, resulting in over $400 billion per year trade between the two countries. Canada is the number one trading partner of the U.S.; Mexico is second, and China ranks third. American companies have more invested in Canada than in any other country. The North American Free Trade Agreement (NAFTA) became effective in 1994; the result is a free trade area with a combined population of 460 million and a total GNP of roughly $18 trillion (see Figure 3-3). The governments of all three nations pledge to promote economic growth through tariff elimination and expanded trade and investment. At present, however, there are no common external tariffs nor have restrictions on labor and other factor movements been eliminated. Illegal immigration from Mexico remains a contentious issue. NAFTA allows for discretionary protectionism (e.g., California avocado growers won protection, allowing Mexican avocados into the U.S. during the winter only in the northeast at a quota). LATIN AMERICA: SICA, Andean Community, Mercosur, CARICOM • (Learning Objective #4) Latin America includes the Caribbean and Central and South America; the market is sizeable, has a huge resource base, and Latin America has begun economic transformation. Balanced budgets are a priority, and privatization is underway. Free markets, open economies, and deregulation are replacing past policies; tariffs are now reduced to 10 to 20 percent. The Secretariat for Central American Economic Integration, headquartered in Guatemala City, helps to coordinate the progress toward a true Central American common market. Common rules of origin were also adopted, allowing for more free movement of goods among SICA countries. SICA countries agreed to conform to a CET of 5 to 20 percent for most goods by the mid-1990s; many tariffs had previously exceeded 100 percent. Starting in 2000, import duties converged to a range of 0 to 15 percent. Implementation of the Central American Free Trade Agreement with the United States created a free trade area known as DR-CAFTA that includes five SICA members (El Salvador, Honduras, Guatemala, Nicaragua, and Costa Rica; Panama is excluded) plus the Dominican Republic. Implementation has been slow, but some changes have already taken effect. Companies in Central America operated in the “shadow economy,” with many commercial transactions going unreported. Government tax revenues should increase as companies join the formal economy to take advantage of CAFTA’s benefits. Despite progress, attempts to achieve integration in Central America have been described as uncoordinated, inefficient, and costly. Tariffs still exist on imports of products—sugar, coffee, and alcoholic beverages, for example—that are also produced in the importing country. Andean Community The Andean Community was formed in 1969 to accelerate development of member states through economic and social integration. (Figure 3-5). The member countries of the Andean Community are: • Bolivia • Colombia • Ecuador • Peru • Venezuela Members lowered tariffs on intra-group trade and decided what products each country should produce. Foreign goods and companies were kept out as much as possible. A sub-regional free trade zone was formed, abolishing foreign exchange, financial and fiscal incentives, and export subsidies by 1992. Common external tariffs were established. Competing ideologies help explain why intraregional trade is not yielding more benefits; Peru and Colombia are pursuing growth via capitalism, whereas the governments in Ecuador and Bolivia have socialist leanings. Venezuela withdrew from the Andean Community in 2006. Common Market of the South (Mercosur) March 2011 marked the 20th anniversary of the signing of the Asunción Treaty. The treaty signified the agreement by the governments of (see Figure 3 -5): • Argentina, • Brazil, • Paraguay, and • Uruguay. Internal tariffs were eliminated, and common external tariffs of up to 20 percent were established; in theory goods, services, and factors of production will move freely. Until this goal is achieved, Mercosur will operate as a customs union. Argentina provides a case study in how a country can emerge from an economic crisis as a stronger global competitor. Argentina’s economy minister responded to the financial crisis of 2001–2002 by implementing emergency measures that included a 29 percent currency devaluation for exports and capital transactions. Argentina was allowed to break from the CET and raise duties on consumer goods. The crisis had a silver lining: virtually overnight, Argentina’s wine exports to the United States were worth four times more when dollar revenues were converted into pesos. The currency devaluation also made Argentine vineyard property cheaper for foreign buyers. Low prices for land, inexpensive labor, and ideal growing conditions for the Malbec grape have combined to make Argentina’s wine industry a major player in world markets. The trade agreement landscape in the region continues to evolve. In 1996, Chile became an associate member of Mercosur. Policymakers opted against full membership because Chile already had lower external tariffs than the rest of Mercosur; ironically, full membership would have required raising them. (In other words, Chile participates in the free trade area aspect of Mercosur, not the customs union.) Chile’s export-driven success makes it a role model for the rest of Latin America as well as Central and Eastern Europe. In 2004, Mercosur signed a cooperation agreement with the Andean Community; as a result, Bolivia, Colombia, Ecuador, and Peru have become associate members. The EU is Mercosur’s number one trading partner; Mercosur is negotiating an agreement with the EU to establish a free trade area. Germany and France are opposed to such an agreement on the grounds that low-cost agricultural exports from South America will harm farmers in Europe. Venezuela began the process of joining Mercosur in 2006, the same year that it withdrew from the Andean Community. For several years, Venezuela reaped the rewards of booming demand and high prices for oil; oil revenues account for 75 percent of its exports. Emerging Markets Briefing Book Brazil As the data in Figure 3-5 clearly show, Brazil is an economic powerhouse in South America. Brazil has the largest geographical territory and the largest population in the region. It has emerged on the world stage as a strong exporter. Rapid economic growth has given policymakers, including President Dilma Rousseff, a greater presence on the global stage and more clout at global trade talks.. One symbol of Brazil’s new role in the global economy is Embraer, a jet aircraft manufacturer (see Exhibit 3-4), Embraer has also established a $50 million joint venture with China Aviation Industry Corporation. Brazil’s agricultural sector is also a leading exporter. Brazil is the world’s number-one exporter of beef, coffee, orange juice (check the label on your orange juice carton), and sugar. Annual coffee bean production totals 40 million 60-kilo bags—one-third of the world total. JBS is the world’s largest meat processor. Brazil is rapidly gaining a reputation as a producer of sugar-based ethanol, which can serve as a sustainable substitute for expensive gasoline. Moving forward, Brazil faces a number of other challenges. Steady appreciation of Brazil’s currency, the real, may require exporters to raise prices. Embraer faces tough competition from Canada’s Bombardier. The country’s infrastructure remains woefully underdeveloped; significant investment is required to improve highways, railroads, and ports. Businesspeople speak of “the Brazil cost,” a phrase that refers to delays related to excessive red tape. Trade with China is presenting both opportunities and threats. In 2009, China surpassed the United States as Brazil’s top trading partner. China’s explosive economic growth has created great demand for soybeans, iron ore, and other Brazilian commodity exports. However, Brazilian manufacturers in light-industry sectors such as toys, eyeglasses, and footwear are facing increased competition from low-priced Chinese imports. Caribbean Community and Common Market (CARICOM) CARICOM was formed in 1973 with the following member states: • Antigua and Barbuda • Bahamas • Barbados • Belize • Dominica • Grenada • Guyana • Haiti • Jamaica • Montserrat • St. Kitts and Nevis • St. Lucia • St. Vincent and the Grenadines • Suriname • Trinidad and Tobago The population of the entire 15-member CARICOM is about 15 million; disparate levels of economic development can be seen by comparing GNP per capita in Antigua and Haiti (Figure 3-6). To date, CARICOM's main objective has been to achieve a deepening of economic integration by means of a Caribbean common market. However, CARICOM was largely stagnant during its first two decades of existence. In 1998, leaders agreed to establish an economic union with a common currency. A recent study of the issue has suggested, however, that the limited extent of intra-regional trade would limit the potential gains from lower transaction costs. English-speaking CARICOM members are concerned with defending their privileged position with the U.S. As of 2000, the Caribbean Basin Trade Partnership Act exempts textile and apparel exports from the Caribbean to the U.S. from duties and tariffs (Figure 3-6). Current Trade-Related Issues One of the biggest trade-related issues in the Western Hemispher is the Free Trade Area of the Americas. Many Latin American countries—Brazil in particular—are frustrated by Washington’s tendency to dictate trade terms that will benefit special interests in the United States. As a result, Brazil and Mercosur advocate a slower, three-stage approach to negotiations with the United States. • First Stage - discussions on business facilitation issues such as standardized customs forms and industry deregulation • Second Stage - dispute settlement and rule of origin • Third Stage - tariffs ASIA-PACIFIC: The Association of Southeast Asian Nations (ASEAN) • (Learning Objective #5) The Association of Southeast Asian Nations (ASEAN) was established in 1967 as an organization for economic, political, social, and cultural cooperation among its member countries. The original six members of ASEAN were: • Brunei • Indonesia • Malaysia • the Philippines • Singapore • Thailand Vietnam became the first Communist nation in the group when it was admitted to ASEAN in July 1995 Cambodia and Laos were admitted at the organization's thirtieth anniversary meeting in July 1997. Burma (known as Myanmar by the ruling military junta) joined in 1998. Individually and collectively, ASEAN countries are active in regional and global trade. ASEAN's top trading partners include Japan, the United States, the European Union, and China. Recently, Japan, China, and Korea were informally added to the member roster; some observers called this configuration “ASEAN plus three.” When the roster expanded again to include Australia, New Zealand, and India, it was dubbed “ASEAN plus six.” January 1, 2010, marked the formal establishment of a new China/ASEAN FTA. The New FTA removes tariffs on 90 percent of traded goods. In fewer than three decades, Singapore has transformed itself from a British colony to a vibrant, 240-square-mile industrial power. Singapore has an extremely efficient infrastructure – the Port of Singapore is the world's second-largest container port (Hong Kong's ranks first) – and a standard of living second in the region only to Japan’s. Singapore accounts for more than one-third of U.S. trading activities with ASEAN countries. Marketing Issues in the Asia-Pacific Rim Mastering the Japanese market takes flexibility, ambition, and a long-term commitment. Japan has changed from being a closed market to one that’s just tough, with barriers in attitudes and laws. Japan requires top-quality products and services, tailored to local tastes. Countless visits and socializing with distributors are necessary to build trust, and marketers must master the keiretsu system of tightly knit corporate alliances. The Cultural Context Bhutan and GNH (Gross National Happiness) In this chapter and the last, national income data have been used to measure the total output of each of the world’s economies. It has been argued, however, that indicators such as GDP and GNI per capita are inadequate. According to some economists and policymakers, supplemental indicators that measure things like social progress, quality of life, and sustainability are needed. Bhutan is a kingdom of 700,000 people in the Himalaya mountains. Per capita GNI is approximately $2,030; using this figure as a metric, Bhutan can be assigned to the lower-middle-income category of nations. However, for the past 40 years, Bhutan has relied on another measure besides economic growth, namely Gross National Happiness (GNH).). The GNH Index includes both objective and subjective indicators: psychological well-being, time use, community vitality, culture, health, education, environmental diversity, living standards, and governance. Not surprisingly, there is some disagreement among social scientists regarding the best way to define, track, and measure such intangibles as happiness and quality of life. Meanwhile, officials in Bhutan have launched a number of initiatives to promote happiness in the kingdom. With the global economic crisis as a backdrop, a first-ever Happiness Congress was held in Madrid in the fall of 2010. WESTERN, CENTRAL, AND EASTERN EUROPE The countries of Western Europe are among the most prosperous in the world. The European Union (EU) • (Learning Objective #6) The EU began in 1958 with the Treaty of Rome and original members Belgium, France, Holland, Italy, Luxembourg, and West Germany. In 1973, Great Britain, Denmark, and Ireland were admitted, followed by Greece in 1981 and Spain and Portugal in 1986. The objective is to harmonize national laws and regulations so that goods, services, people, and eventually money can flow freely across national boundaries. The EU encourages a community-wide labor pool and establishes rules of competition patterned after U.S. antitrust law. Improvements to highway and rail networks are underway. Finland, Sweden, and Austria joined in 1995 Cyprus, the Czech Republic, Estonia, Hungary, Poland, Latvia, Lithuania, Malta, the Slovak Republic, and Slovenia became full EU members on May 1, 2004. Bulgaria and Romania joined in 2007. Croatia, the newest member, joined July 1, 2013. Today, the 28 nations of the EU represent 500 million people and a combined GNI of more than $15.0 trillion. The 1992 signing of the Maastricht Treaty (Netherlands) set the stage for the creation of an economic and monetary union with a European central bank and a single European currency, the euro. The euro brings the benefits of eliminating currency conversion costs and exchange rate uncertainty. In 2002, euro coins and paper money were issued to replace national currencies such as the French franc. Marketing Issues in the European Union The European Commission establishes directives and sets deadlines for their implementation by legislation in individual nations. The business environment in Europe has undergone considerable transformation since 1992 with significant implications for all elements of the marketing mix. Marketing mix issues must be addressed in Europe's single market (e.g., content and other product standards that varied among nations must be harmonized). Harmonization means that content and other product standards that varied among nations have been brought into alignment. Direct comparability of prices in the euro zone forces companies to review pricing policies; the marketing challenge is to develop strategies to take advantage of a large, wealthy market. The enlargement of the EU will further impact marketing strategies and harmonized laws; food safety laws in the EU are different from those in Central European countries. Because they are in transition, the markets of Central and Eastern Europe present interesting opportunities and challenges. Global companies view the region as an important new source of growth, and the first country to penetrate a country market often emerges as an industry leader. Exporting has been favored as a market entry mode, but direct investment is on the rise; low wage rates, below Spain, Portugal and Greece, make this region attractive for low-cost manufacturing. For consumer products, distribution is a critical marketing mix element because availability is key to sales; studies show that consumers and businesses are embracing global brands. A study found a high degree of standardization of marketing program elements; the core product and brand elements were largely unchanged from those used in Western Europe. THE MIDDLE EAST • (Learning Objective #7) The Middle East includes 16 countries: • Afghanistan • Bahrain • Cyprus • Egypt • Iran • Iraq • Israel • Jordan • Kuwait • Lebanon • Oman • Qatar • Saudi Arabia • Syria • The United Arab Emirates • Yemen The majority is Arab, a large percentage Persian, and a small percentage Jews. The population is 95 percent Muslim and 5 percent Christian and Jewish. Despite apparent homogeneity, many differences exist. Middle Eastern countries fall into all categories of the index of economic freedom from “mostly free” (Bahrain, Kuwait, Saudi Arabia, United Arab Emirates) to “repressed” (Iran and, until the 2003 regime change, Iraq). The Middle East lacks a single societal type with a typical belief, behavior, and tradition; each major city has many social groups, different in religion, social class, education, and wealth. The price of oil drives business. Bahrain, Iraq, Iran, Kuwait, Oman, Qatar, and Saudi Arabia hold significant world oil reserves which have widened the gap between rich and poor nations. In 2011, the region was rocked by demonstrations and protests that have been described as “the Arab awakening” and “the Arab spring”. Disparities contribute to political and social instability. Saudi Arabia is the main market in the region, with 25 percent of the world’s known oil reserves. Cooperation Council for the Arab States of the Gulf The key regional organization is the Gulf Cooperation Council (GCC), which was established in 1981. The six gulf countries hold about 45 percent of the world’s known oil reserves, but production is only about 18 percent of world oil output (Figure 3 -10). Saudi Arabia and other Middle Eastern countries post account deficits because they import most goods and services and depend on oil revenues to pay for imports. The organization provides coordination, integration and cooperation in all economic, social, and cultural affairs. Committees coordinate trade development, industrial strategy, agricultural policy, and uniform petroleum policies and prices. Goals include establishing an Arab Common Market and increasing trade ties with Asia. In 1989, two other organizations were formed: • Morocco, Algeria, Mauritania, Tunisia, and Libya formed the Arab Maghreb Union (AMU); • Egypt, Iraq, Jordan, and North Yemen created the Arab Cooperation Council (ACC). Many Arabs see their regional groups as economic communities to foster the development of inter-Arab trade and investment. Marketing Issues in the Middle East Connection is a key word in conducting business in the Middle East; developing relationships with key business and government figures is likely to cut through red tape. Bargaining is culturally ingrained, and business people should be prepared for haggling; establishing personal trust, mutual trust, and respect are essential. Decisions are not made by correspondence or telephone. The Arab businessperson does business with the individual, not the company. Women are not usually part of the business or entertainment scene for traditional Muslim Arabs. AFRICA • (Learning Objective #8) The African continent is an enormous landmass which a territory of 11.7 million square miles. It is not really possible to treat Africa as a single economic unit. The 54 nations on the continent can be divided into three distinct areas: • the Republic of South Africa, • North Africa, and • sub-Saharan or Black Africa. With 1.3 percent of the world's wealth and 11.5 percent of its population, Africa is a developing region with an average per capita income of less than $600. The Arabs living in North Africa are differentiated politically and economically from the rest of Africa. The six northern nations are richer and more developed, and several—notably Libya, Algeria, and Egypt— benefit from large oil resources. The Middle East and North Africa are viewed as a regional entity “Mena”; the economies of non-oil, “emerging Mena” (Jordan, Lebanon, Morocco, Tunisia) have performed well in recent years. Economic Community of West African States (ECOWAS) The Treaty of Lagos establishing the Economic community of West African States (ECOWAS) was signed in 1975 to promote trade, cooperation, and self-reliance in West Africa: • Benin • Burkina Faso • Cape Verde, • The Gambia, • Ghana • Guinea • Guinea-Bissau • Ivory Coast • Liberia • Mali • Mauritania • Niger • Nigeria • Senegal • Sierra Leone • Togo In 1980, members established a free trade area for unprocessed agricultural products and handicrafts. By 1990, tariffs on twenty-five items had been eliminated, with measures taken to create a single monetary zone by 1994. Still, economic development has occurred unevenly in the region. East African Cooperation Kenya, Uganda, Tanzania, Rwanda, and Burundi are the five nations that comprise the world’s newest common market (see Figure 3-12). The East African Community’s origins date back more than 40 years, but it has only been since 1999 that substantial progress has been made toward integration and cooperation. Today’s East African Community has evolved through several of the stages listed in Table 3-2. In 2005, a customs union was implemented.. South African Development Community (SADC) SADC promotes trade, cooperation, and economic integration; members include: • Angola • Botswana • Democratic Republic of Congo • Lesotho • Malawi • Mauritius • Mozambique • Namibia • South Africa • Seychelles • Swaziland • Tanzania • Zambia, • Zimbabwe The goal is a fully developed customs union. South Africa joined the community in 1994, and represents 75 percent of regional income and 86 percent of intraregional exports In 2000, an 11-nation free trade area was finally established. South Africa and the EU signed a Trade, Development, and Cooperation Agreement (TDCA) in 2000. South Africa, Botswana, Lesotho, Namibia, and Swaziland belong to the Southern African Customs Union (SACU). Marketing Issues in Africa In 2000, President George W. Bush signed the African Growth and Opportunities Act (AGOA) into law. Created with the theme of “Trade, not Aid”, the law is designed to support African nations that make significant progress toward economic liberalization. AGOA also represents a formal step toward a U.S.-Africa free trade zone. CASES Case 3-1: Global Trading Partners Look East and West for Economic Growth Global trade talks have been taking on a distinctly bicoastal character lately. Looking east and west across the Pacific Ocean, the United States and several Asian countries are hammering out the details of a trade framework known as the Trans-Pacific Partnership (TPP). The goal is an ambitious one: to create a free trade area that will lead to long-term economic growth. Discussion Questions 3-9. What critical thinking issues are raised by this case? Answer: The issue of product labeling and how different countries define cheese is the just the beginning of how cultures around the world view food. A cultural issue is raised regarding the film industry in certain parts of Europe and China’s issue of American ‘containment’. 3-10. Are you in favor of dropping U.S. tariffs on footwear, even if it means some New Balance employees will lose their jobs? Answer: Student answers will vary, but the term perspective must be/should be included in any student answer. Dropping U.S. tariffs on footwear could lower consumer prices and enhance trade relations, but it may lead to job losses for workers in domestic industries like New Balance. Balancing economic efficiency with job protection is crucial; measures such as retraining programs and targeted support for affected workers can help mitigate the impact on employment while pursuing broader economic benefits. 3-11. Do you think Americans and Europeans can overcome deeply entrenched disagreements and reach an accord? Answer: Student answers will vary. Students need to address the ‘carve-outs’ or exemptions being discussed. Yes, Americans and Europeans can potentially overcome entrenched disagreements by fostering dialogue, mutual understanding, and collaboration on shared goals. Building on common interests such as trade, security, and climate change can help bridge gaps. Successful resolution will depend on willingness to compromise and address each side's core concerns effectively. 3-12. Japanese rice farmers are opposed to Japan joining the TPP. Why? Answer: Japanese rice farmers don’t want the government to treat food as a commercial business. Many Japanese rice farmers are concerned with their traditions. The farmland and rice farming is at the core of their culture. Japanese rice farmers oppose Japan joining the Trans-Pacific Partnership (TPP) due to concerns that increased competition from foreign rice imports could undermine their livelihoods. They fear that tariff reductions would flood the domestic market with cheaper rice, negatively impacting local rice prices and threatening their ability to sustain their farms. Case 3-2: Will the Euro Survive? Faced with huge budget deficits, Europe’s leaders have been forced to introduce sweeping economic reforms. They have instituted unprecedented austerity measures in order rein in runaway government budgets. Desperate to prop up economies teetering on the brink of collapse, EU’s leadership devised a 750 billion rescue package. Discussion Questions 3-13. Why did the European Commission bail out banks in Ireland and Greece? Why not let them default? Answer: Defaulting would endanger the Euro Zone and the euro as the currency of Europe and drag down the more stable economies of Europe like Germany and France. The European Commission bailed out banks in Ireland and Greece to prevent financial contagion and stabilize the broader Eurozone economy. Allowing defaults could have led to severe economic instability, bank runs, and widespread loss of confidence in the financial system. The bailouts aimed to restore stability, protect savings, and maintain market confidence. 3-14. Investors demand that Portugal’s José Sócrates and other leaders make big spending cuts. However, Sócrates and other socialist prime ministers would prefer to generate economic growth via government spending. Does this make Sócrates, Zapatero, and like-minded leaders Keynesians? Or are they following Hayek’s principles? Answer: Student answers will vary but all should make the case for either the Keynesian theory of government spending or Hayek’s free market position. Keynesian for government intervention and Hayek’s for no government intervention. José Sócrates and similar leaders favoring government spending to generate economic growth align more with Keynesian principles, which advocate for increased government expenditure to stimulate demand during economic downturns. This contrasts with Hayek’s principles, which emphasize minimal government intervention and reliance on market forces to drive economic recovery. 3-15. Why do citizens in France, Great Britain, and elsewhere stage protests when the government imposes austerity measures? Answer: An opinion question but most students should note that people do not like to have benefits taken away from what they are now use to receiving be it—longer work weeks, longer hours, less pay for the same work. Citizens in France, Great Britain, and other countries protest austerity measures because these policies often involve cuts to social services, pensions, and public sector jobs, which can lead to reduced living standards and economic hardship for many people. The protests reflect concerns over the impact on personal welfare and opposition to perceived unfairness in the distribution of the economic burden. TEACHING TOOLS AND EXERCISES Additional Cases: "Airwide International" by John Zerio, Samarth Sangal, Tanmay Saraykay, 10/09. HBS: TB 001. "ASIMCO Technolgoies: 2005" by Xi Liu; Taehoo Kim; Liang Liu; Guangyu Nie; Wanhong Shao; Xiaotian Xie HBS: 910A01-PDF-ENG. “Inclusion: The More the Merrier – Why It’s Important in Marketing and Politics” John A. Quelch, Katherine A. Jocz, HBS 7857BC, Press Chapter. “Nations: No Quick Fix – Applying Marketing Concepts to How They Compete”, Hohn A. Quelch, Katherine A. Jocz, HBS 7861BC. Activity: Students should be preparing or presenting their Cultural-Economic Analysis and Marketing Plan for their country and product as outlined in Chapter 1. Video: This video is an interview with an international marketing consultant discussing different global marketing strategies. This video can fit well into many of the chapters. It highlights the features and considerations necessary when developing an international marketing strategy. Link: http://www.youtube.com/watch?v=iHChY9zVHJ8 Out-Of-Class Reading: Mejias, Roberto J. and Jose G. Vargohernandez. “Emerging Mexican and Canadian Strategic Trade Alliances under NAFTA. Journal of Global Marketing 14, no. 4 (2001), pp. 89-116. Guest Speakers: Invite a student from a country on the euro (for example, Spain) and another one from a country not on the euro (such as Brazil). Initiate a class discussion with the two on the pros and cons of having a common currency. SUGGESTED READING Books Abengunrin, Olayiwola. Economic Dependence and Regional Cooperation in Southern Africa: SADCC and South Africa in Confrontation. Lewiston, N.Y.: The Edwin Mellen Press, 1990. Anderson, Kym, and Richard Blackhurst, eds. Regional Integration and the Global Trading System. New York: Harvester/Wheatsheaf, 1993. Axline, W. Andrew. The Political Economy of Regional Cooperation. London: Pinter, 1994. Fallows, James M. Looking at the Sun: The Rise of the New East Asian Economic and Political System. New York: Vintage Books, 1995. Letterman, Gregory G. Basics of Multilateral Institutions and Multinational Organizations: Economics and Commerce. Ardsley, NY: Transnational, 2002. Odell, John, ed. Negotiating Trade: Developing Countries in the WTO and NAFTA. Cambridge, England: Cambridge University Press, 2006. Ohmae, Kenichi. The End of the Nation State: The Rise of Regional Economies. New York: Free Press, 1995. Roett, Riordan, ed. Mercosur: Regional Integration, World Markets. Boulder, Colorado: Lynne Rienner Publishers, 1999. Articles Aho, C. Michael. “'Fortress Europe: Will the EU Isolate Itself from North America and Asia?” The Columbia Journal of World Business 29, no. 3 (Fall 1994), pp. 32-39. Bakos, Gabor. “After COMECON: A Free Trade Area in Central Europe?” Europe-Asia Studies 45, no. 6 (1993), pp. 1025-1044. Banks, Philip. “India: The New Asian Tiger?” Business Horizons 38, no. 3 (May 1995), pp. 47-50. Bernal, Richard L. “From NAFTA to Hemispheric Free Trade.” The Columbia Journal of World Business 29, no. 3 (Fall 1994), pp. 22-31. Czinkota, Michael R. “The World Trade Organization – Perspectives and Prospects.” Journal of International Marketing 3, no. 1 (1995), pp. 85-91. Healey, Nigel M. “The Transition Economies of Central and Eastern Europe: A Political, Economic, Social and Technological Analysis.” The Columbia Journal of World Business 29, no. 1 (Spring 1994), pp. 62-70. Krum, James R. and Pradeep A. Rau. “Organizational Responses of U.S. Multinationals to EC-1992: An Empirical Study.” Journal of International Marketing 1, no. 2 (1993), pp. 49-70. McQueen, Matthew. “Lomé Versus Free Trade Agreements: The Dilemma Facing ACP Countries.” World Economy 21, no. 4 (June 1998), pp. 421-444. Mejias, Roberto J. and Jose G. Vargohernandez. “Emerging Mexican and Canadian Strategic Trade Alliances under NAFTA.” Journal of Global Marketing 14, no. 4 (2001), pp. 89-116. Solution Manual for Global Marketing Warren J. Keegan, Mark C. Green 9780133545005, 9781292017389
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