Chapter 3:	Regional Market Characteristics and			Poorna Pal, MS MBA Ph.D. Glendale Community College Phone: (818)240-1000 x 5517 ppal@glendale.edu Office: SG-152 Office Hours: MWTTh: 3.15 - 5.15 PM (SG-152) or by appointment with your questions
		Preferential Trade Agreements
		Overview Lecture Outline	Discussion Questions Test Your Knowledge
	Overview The GATT (General Agreement on Tariffs and Trade) and the WTO (World Trade Organization) 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. World Trade Organization (WTO), the successor to GATT, was born in 1995, provides a forum for trade-related negotiations among its 150 members and mediates trade disputes. The Dispute Settlement Body (DSB) of WTO mediates complaints concerning unfair trade barriers; during a 60-day consultation period, parties engage in good-faith negotiations. 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 2006 were not successful.			Chapter Overviews, Outlines and Sample Questions Introduction to Global Marketing The Global Economic Environment Regional Market Characteristics and Preferential Trade Agreements Social and Cultural Environments The Political, Legal, and Regulatory Environments Global Information Systems and Market Research Segmentation, Targeting, and Positioning Importing, Exporting, and Sourcing Global Market Entry Strategies: Licensing, Investment, and Strategic Alliances Brand and Product Decisions In Global Marketing Pricing Decisions Global Marketing Channels and Physical Distribution Global Marketing Communications Decisions I: Advertising and Public Relations Global Marketing Communications Decisions II: Sales Promotion, Personal Selling, Special Forms of Marketing Communication Digital Revolution Strategic Elements of Competitive Advantage Leadership, Organization, and Corporate Social Responsibility
	The GATT treaty 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.

• 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 represent 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).

  • Examples of customs unions are the Andean Community, the Central American Integration System (SICA), Mercosur, and CARICOM.

• 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.

• 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 policy 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 involves 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

  • North America, which includes Canada, the United States, and Mexico, comprises a distinctive regional market. Of them, 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.

  • Of the top trading partners of the U.S., Canada is the number one trading partner, 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 430 million and a total GNP of roughly $14 trillion (see Table 3-4 and Figure 3-2).

  • Why does NAFTA create a free trade area as opposed to a customs union or a common market?

    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. But 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

  • 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.

  • Global corporations see import liberalization, prospects for lower tariffs within sub-regional trading groups, and the potential for more efficient production. Many envision a free trade area throughout the hemisphere.

  • What are the most important trading arrangements in Latin America?

• Central American Integration System

Central America is trying to revive its common market, which originally had five members:  El Salvador, Honduras, Guatemala, Nicaragua and Costa Rica.

In 1997, with Panama as a member, the group changed its name to the Central American Integration System (SICA). (Table 3-5 shows the income and population data in the region).

Common rules of origin allow for freer movement of goods among SICA countries which agreed to a common external tariff of 5 to 20 percent for most goods by the mid-1990s. Still, attempts to achieve integration are uncoordinated, inefficient, and costly (e.g., there are still tariffs on imports of products – sugar, coffee, and alcoholic beverages.)

• Andean Community

  The Andean Community was formed in 1969 to accelerate development of member states through economic and social integration. (Figure 3-4 and Table 3-6).

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. While Peru has one of the fastest-growing economies in the region, Ecuador has experienced years of economic and political instability. Overall, rural residents and the urban poor in the region have become frustrated and impatient with the lack of progress.

• Common Market of the South (Mercosur)

  March 2006 marked the fifteen anniversary of the signing of the Asunción Treaty that established MERCOSUR.

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.

Trade among member nations peaked at $20 billion in 1998.

A major impediment to further integration is the lack of economic and political discipline and responsibility – a situation reflected in the volatile currencies of Mercosur countries. Argentina provides a case study in how a country can emerge from an economic crisis as a stronger global competitor.  In 2002, Argentina devalued its currency by 29 percent for exports and capital transactions.  (Table 3 – 7).

In 1996, Chile became an associate member of Mercosur; policymakers blocked full membership because Chile had lower external tariffs that the rest of Mercosur. Chile had been negotiating for inclusion in NAFTA; however, after Mexico’s deficit with the U.S. became a trade surplus, U.S. interest in expanding NAFTA cooled. Chile’s export-driven success makes it a role model for the rest of Latin America as well as Central and Eastern Europe. Bolivia, Colombia, Ecuador, and Peru are associate members of Mercosur, because they recently agreed to merge with the Andean Community.

The EU is Mercosur’s number-one trading partner.

Venezuela became a full Mercosur member in 2006. Flush with revenues from oil exports, Venezuela is expected to have a positive impact on regional integration.

• Caribbean Community and Common Market (CARICOM)

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.(Table 3-8).

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 defend their privileged position with the U.S. (e.g., Guatemala). 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 3-5).

• Current Trade-Related Issues

  One of the biggest issues pertaining to trade is the Free Trade Area of the Americas. Many Latin American countries—Brazil in particular—are frustrated by America’s broken promises. As a result, Brazil and Mercosur advocate slower three-stage negotiations to include:

  1. discussions on customs forms and deregulation;

  2. dispute settlement and

  3. rules of origin; and tariffs.

• ASIA-PACIFIC: The Association of Southeast Asian Nations (ASEAN)

  • 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.

Vietnam became the first Communist nation in the group when it was admitted to ASEAN in July 1995. (Figure 3-6 and Table 3 -9). 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.

• Who are ASEAN’s top three trading partners? Individually and collectively, ASEAN countries are active in regional and global trade. ASEAN's top trading partners include the United States ($52.8 billion in 2002 exports), the European Union ($48 billion in exports), and China ($23 billion). In 1994, economic ministers from the member nations agreed to implement an ASEAN Free Trade Area (AFTA) by 2003, 5 years earlier than previously discussed.
   
• What is “ASEAN plus three”? What countries were added to result in “ASEAN plus six”? 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.”
   
• SINGAPORE:

  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.

• WESTERN, CENTRAL, AND EASTERN EUROPE:

  The countries of Western Europe are among the most prosperous in the world. Entering the first decade of the twenty-first century, the governments of Western Europe have achieved unprecedented levels of economic integration.
   

  • The European Union (EU) (Table 3-10).

    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. 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. Today, the 27 nations of the EU represent 490 million people and a combined GNI of $15.0 trillion.

    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.

    The 1991 Maastricht Treaty prepared the transition to an economic and monetary union (EMU) with a European central bank and a new 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 business environment in Europe has undergone considerable transformation since 1992, with significant implications for all elements of the marketing mix. (Table 3 -11).

    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. (Table 3-11).

    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 form 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 a favorite entry mode, but direct investment is on the rise; low wage rates, below Spain 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

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, 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.

Disparities contribute to political and social instability. Saudi Arabia is the main market in the region, with 25 percent of the worlds known oil reserves. During the Persian Gulf War against Iraq, Gulf Arabs broke unwritten rules including accepting help from the U.S., an ally of Israel. Anti-Americanism flared in 2003 during the invasion of Iraq to remove Saddam Hussein from power. Having returned sovereignty to Iraq in June 2004, Americans remain in Iraq.

• Cooperation Council for the Arab States of the Gulf

  The Gulf Cooperation Council (GCC) 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. (Table 3 -12 and Figure 3 -8). 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 are 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 part of the business or entertainment scene for traditional Muslim Arabs.

• AFRICA:

  • It is not really possible to treat Africa as a single economic unit.

  • What are the three unique regions of 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. The six northern nations are richer and more developed, and several—notably Libya, Algeria, and Egypt— benefit from large oil resources.

• For what does the acronym “Mena” stand?

  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 best.
   

• Economic Community of West African States (ECOWAS) (see Table 3 – 13).

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

  In 1996, Kenya, Uganda, and Tanzania established a mechanism to promote free trade and economic integration. Tariff issues and a customs union are being explored. Development of regional tourism and energy projects are underway.
   

• South African Development Community (SADC)

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.

South Africa has explored the formation of a free trade area with the EU.

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.

Discussion Questions

1. Explain the role of the World Trade Organization. Why has the Doha Round of trade talks stalled?
   
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2. 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.

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3. The creation of the Single Market in Europe has led to harmonization.  What does this mean?  How does harmonization affect a company’s global marketing strategies?

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4. What are the criteria for joining the euro zone?

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5. 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.

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