CHAPTER EIGHT

CROSS-NATIONAL COOPERATION
AND AGREEMENTS

OBJECTIVES
• To profile the World Trade Organization
• To discuss the pros and cons of global, bilateral, and regional integration
• To describe the static and dynamic effects and the trade creation and diversion
effects of bilateral and regional economic integration
• To define different forms of regional economic integration
• To present different regional trading groups, such as the European Union (EU),
the North American Free Trade Agreement (NAFTA), and Asia-Pacific Economic
Cooperation (APEC)
• To describe the rationale for and success of commodity agreements

CHAPTER OVERVIEW
Regional economic integration represents a relatively new phenomenon in the history of
world trade and investment. Chapter Eight first examines the roles of the General
Agreement on Tariffs and Trade and the World Trade Organization in determining the
ground rules of the world trade environment. It then introduces the basic types of
economic integration and explores the potential effects of the process. Next it examines
in detail both the European Union (its structure and its operations) and the North
American Free Trade Agreement and briefly describes a variety of other regional
economic groups. The chapter concludes with a discussion of various commodity
agreements and producer alliances, including the Organization for Petroleum Exporting
Countries.

CHAPTER OUTLINE

OPENING CASE: TOYOTA IN EUROPE

Known for its low-cost, efficient production operations, and with 2004 global sales of
approximately 6.78 million units and a net income of more than US $11 billion, Toyota
Motor Corp. was not only the world’s third largest manufacturer of automobiles, it was
the most profitable of all. Toyota’s goal is to capture a 15 percent share of the global
market and become the world’s top producer of automobiles by 2010. In 2004 Toyota
had 46 production facilities located in 26 countries, including 9 in Western and Eastern
Europe. Prior to 2002 Toyota had not posted a profit in Europe for more than three
decades. However, during that time there was an agreement in effect between the
Japanese government and the then European Community to severely limit the number of

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Japanese vehicles that could be exported to Europe. When the quota system and other
restrictions were lifted in 1999, Toyota responded by establishing a European Design and
Development center in southern France and capturing distinct cost advantages by setting
up additional production centers in East Europe. Toyota’s European market share and
profitability began to grow steadily, as Europeans became less loyal to their own regional
brands in their search for more economical, higher quality cars. In fact, in 2005 Toyota’s
environmentally friendly hybrid vehicle, the Prius, was voted European Car of the Year.

TEACHING TIPS: Carefully review the PowerPoint slides for Chapter Eight. Also,
review the corresponding video clip, “European Union” [12:00].

I. INTRODUCTION
Trade blocs are a significant influence on the strategies of MNEs because they define
the size of regional markets and the rules by which companies must operate.
Economic integration represents an agreement between or among nations within a
geographic region, i.e., an economic bloc, to reduce and ultimately remove within
the bloc tariff and nontariff barriers to the free flow of products, capital, and labor.
Approaches to economic integration include global integration via the World Trade
Organization, bilateral integration between two countries, and regional
integration via an economic bloc.

II. THE WORLD TRADE ORGANIZATION (WTO)

The World Trade Organization has become the primary multilateral forum through
which governments conclude trade agreements and settle associated disputes.
A. GATT: The Predecessor
The General Agreement on Tariffs and Trade (GATT) was established in
1947 by twenty-three signator nations as a multilateral agreement whose
objective was to liberalize world trade. The fundamental principle of “trade
without discrimination” was embedded in the most-favored-nation (MFN)
clause, i.e., the principle that each member nation must open its markets equally
to every other member nation. Eight major rounds of negotiations from 1947 to
1994 [see Table 8.1] led to a wide variety of multilateral reductions in both tariff
and nontariff barriers. At the conclusion of the Uruguay Round in 1994, the
World Trade Organization was created for the purpose of institutionalizing the
GATT.
B. The WTO
The World Trade Organization (WTO) was founded in 1995 as a permanent
world trade body for the purposes of (i) facilitating the development of a free
and open international trading system according to the GATT and (ii) the
adjudication of trade disputes between or among member nations. The WTO
adopted the principles and agreements reached under the auspices of the GATT,
but it expanded its mission to include trade in services, investment, intellectual
property, sanitary measures, plant health, agriculture, textiles, and technical
barriers to trade. Currently the 140+ member countries of the WTO collectively

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 account for more than 90 percent of the value of world trade. Major decision-
making units include: the Ministerial Conference, the General Council, the
Goods Council, the Services Council, and the Council on Trade-Related Aspects
of Intellectual Property (TRIPS).
1. Normal Trade Relations. The WTO replaced the GATT’s most-
favored-nation clause with the concept of normal trade relations (NTRs),
which prohibits any sort of trade discrimination. With the following
exceptions, it restricts this privilege to official members:
• Under the Generalized System of Preferences (GSP), manufactured
goods of emerging economies are given preferential treatment (subject
to lower barriers) over those from industrial countries in member
markets.
• Concessions granted to members of economic blocs, such as the
EU or NAFTA, are not extended to countries outside the blocs.
Exceptions can be made in times of war or international tension.
2. Settlement of Disputes. Under the WTO there is now a clearly defined
mechanism for the settlement of disputes. Countries may bring charges of
unfair trade practices to a WTO panel; accused countries may appeal; WTO
rulings are binding. If an offending country fails to comply with a
judgment, the rights to compensation and countervailing sanctions will
follow.
3. Doha Round. The Doha Round began in Doha, Qatar in 2001 to address
disputes between developed and developing nations. Issues surrounding
agricultural subsidies have been particularly difficult.

III. THE RISE OF BILATERAL AGREEMENTS

Currently, bilateral agreements, also known as Preferential Trade Agreements
(PTAs) (and also referred to by some as Free Trade Agreements (FTAs)) are some-
times negotiated by partner nations as a way to circumvent the multilateral trading
system and meet their mutual trading objectives.

IV. REGIONAL ECONOMIC INTEGRATION

Regional Trade Agreements or RTAs involve multiple countries engaged in the
process of economic integration. Neighboring countries tend to ally with one
another because of their proximity, their somewhat similar tastes, the relative ease of
establishing channels of distribution, and a willingness to cooperate with one another
for the greater benefit of the allied parties. The two basic types of regional economic
integration that address barriers to trade are:
• Free Trade Agreements, in which all barriers to trade, i.e., tariff and nontariff
barriers, are abolished among member nations, but each member determines its
own external trade barriers beyond the bloc
• Customs Unions, in which all barriers to trade, i.e., tariff and nontariff barriers,
are abolished among member nations, and common external barriers are levied
against non-member countries.
When moving beyond the reduction of tariff and nontariff barriers, a bloc may
become a common market by also permitting the free flow of capital and labor. It

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 may go even further by harmonizing commercial, monetary, and fiscal policies and
establishing a common currency, plus a supranational political structure dedicated to
dealing with common economic issues. [Note: many authors refer to a fourth and
final stage beyond the common market as an economic union.]
A. The Effects of Integration
Regional economic integration can affect member countries in social, cultural,
economic, and/or political ways. (MNEs are, or course, particularly interested
in the economic effects.) Static effects represent the shifting of resources from
inefficient to efficient firms as trade barriers fall. Dynamic effects represent the
gains from overall market growth, the expansion of production, the realization
of greater economies of scale and scope, and the increasingly competitive nature
of the market. Static effects may occur when either of two results occurs.
1. Trade creation. Trade creation occurs when production shifts from less
efficient domestic producers to more efficient regional producers for
reasons of absolute or comparative advantage. Because of the larger size of
the market, competitors are able to reduce their unit costs by capturing
economies of scale. As a result, customers gain access to a wider variety of
lower cost, higher quality products.
2. Trade diversion. Trade diversion occurs when, as a result of the
imposition of common external barriers, trade shifts from more efficient
external sources to less efficient suppliers within the bloc. (When lower
cost, externally-sourced products are suddenly confronted by trade barriers,
the effective delivered cost of those products increases; thus, the quantity
that can be purchased for a given amount of money is reduced.)
B. Major Regional Trading Groups
Trading groups can be organized by type and/or region. Firms are interested in
regional trading groups because they can serve as potential markets, sources of
raw materials and production factors, and facilities locations.

V. THE EUROPEAN UNION

The European Union represents the most advanced regional trade and investment
bloc in the world today. It evolved from the European Economic Community
(EEC) to the European Community (EC) to the European Union (EU). [Key
mile-stones are summarized in Table 8.2.] Detailed information on the history,
structure, and function of the EU is available on its extensive website. [See Map
8.1.] The European Free Trade Association (EFTA) consists of Iceland,
Liechtenstein, Norway, and Switzerland; all but Switzerland are linked to the EU via
a customs union known as the European Economic Area (EEA).
A. The EU’s Organizational Structure
While the European Council is designed to lead the EU, the European Com-
mission functions as its draftsman and servant, the European Parliament is its
sounding board, and the European Court of Justice serves as the supreme
appeals court for EU law. These governance bodies set the parameters under
which MNEs must operate within the bloc.
1. The European Commission. The European Commission provides
the EU’s political leadership and direction; it consists of twenty members

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 appointed by member countries for four-year renewable terms. The
Commission is responsible for proposing EU legislation, implementing
EU legislation, and monitoring compliance with EU laws by member
nations.
2. European Council. Also known as the Council of Ministers, the
European Council is composed of one representative from the
government of each member state, but the particular membership varies
according to the topic under consideration. The Council can adopt,
amend, or ignore Commission-proposed legislation. It sets priorities,
gives political direction, and resolves issues that the European
Commission cannot.
3. The European Parliament. Composed of 626 members (allocated on
the basis of country population) elected every five years, the European
Parliament considers legislation presented by the European Commission;
if the legislation is approved, it is then submitted to the European Council
for final adoption. The Parliament also has control over the EU budget
and supervises executive decisions.
4. The European Court of Justice. The European Court of Justice
ensures consistent interpretation and application of EU treaties. Dealing
mostly with economic matters, it serves as an appeals court for
individuals, firms, and organizations fined by the Commission for
infringing upon Treaty Law.
B. The Single European Act
The EU has been moving toward a single market ever since the passage of the
Single European Act of 1987. It is designed to eliminate any remaining
nontariff barriers to trade within the bloc.
1. Common Trade and Foreign Policy. The EU’s influence in the
world trade arena depends upon its ability to negotiate with its trade
partners as a single entity. During the initial formation of the EU, the
focus was primarily upon economic integration. Over time, however,
member countries began to recognize the benefits that could be realized
from a common foreign policy as well. In 1993 the EU began to formalize
common objectives on armed conflicts, human rights, and other
international foreign policy issues, although national attitudes often
remain splintered.
2. The Euro. The Treaty of Maastricht of 1992 sought to foster both
political and monetary union within the EU. While the move toward a
common currency has partially eliminated different currencies as a barrier
to trade, not all members have adopted the euro. (Members adopting the
euro at the time of its launch on January 1, 1999, were Austria, Belgium,
Germany, Finland, France, Ireland, Italy, Luxembourg, the Netherlands,
Portugal, and Spain; Greece followed suit on January 1, 2001.) Now one
of the most widely traded currencies in the world, the euro facilitates price
transparency for customers and eases pricing decisions and transaction
reconciliations for firms.

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C. EU Expansion
The EU expanded from 15 to 25 countries in 2004 by admitting countries
primarily from central and eastern Europe. [See Map 8.1.] Although this
expansion increased the EU’s population by 74.3 million people and added more
than $428 billion (US) to its economic output, the integration of such disparate
countries will not be easy. Most are poor, agriculturally-based, newly
democratized economies which, when taken together, will seriously strain the
EU’s financial resources. Another challenge is the issue of governance, because
economically large members of the EU fear that the addition of so many new
countries will weaken their control and influence.
D. Trade Disputes between the EU and the U.S.
Relations between the United States and the EU were strained in early 2001
when the United States attempted to impose heavy tariffs on steel imports and
increased its protective farm subsidies. However, following warnings from the
WTO, both actions were dropped. Then in 2004 the United States and the EU
filed complaints with the WTO against each other regarding their long-standing
dispute over aircraft subsidies. Given the likelihood that the WTO would come
down hard on both sides, they have chosen instead to attempt to resolve the
issue through a series of bilateral negotiations.
E. Implications of the EU for Corporate Strategy
There are at least three ways in which the competitive strategies of foreign firms
that choose to do business within the EU are affected. First, they must deter-
mine their production site location(s) on the basis of total costs that include
labor, transportation, and other strategic factors. Second, foreign firms must
decide upon an entry strategy, i.e., sole ownership vs. joint venture, acquisition
vs. greenfield investments, licensing, or some other entry form. Third, firms
must be sensitive to essential national differences, particularly in areas such as
economic growth rates and cultural traditions. In addition, the trade-offs
between the advantages of pan-European strategies and more localized strategies
must be continually examined.
F. Main Challenges Facing the EU
Four basic challenges currently confront the EU. First is the transition of new
entrants into the United States that are entering with significantly lower wage
rates, lower taxes, but two to four times the growth rates of the EU-15.
Privileges of guest workers from entering countries will be somewhat limited
until 2010, and those countries will have to work hard to quality to enter the
euro zone. Second is the adoption of a new constitution, which must be passed
unanimously by all member states in order to take effect. While it will not
replace individual national constitutions, member states are grappling with the
degree of national sovereignty they are willing to surrender to Europe as a
whole. Third is the issue of the Common Agricultural Policy (CAP), which is
designed to (i) provide farmers with a reasonable standard of living on the one
hand, and (ii) to provide consumers with safe, quality food at fair prices on the
other. Agricultural subsidies in the EU are a major sticking point with both
internal constituencies and non-member nations as well. Fourth is the fact that

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 the four largest economies of the EU dwarf the others in both population and
national income. As countries strive to harmonize their tax, fiscal, and monetary
policies, the challenge to successfully balance countervailing forces will, in
some ways at least, continue to be difficult.

VI. NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)

Effective as of January 1, 1994, the North American Free Trade Agreement
(NAFTA) incorporates Canada, Mexico, and the United States into a regional trade
bloc of countries of quite different sizes and sources of national wealth. More than
a mere free trade agreement and claiming a total GNI greater than that of the 25-
member EU, NAFTA calls for the elimination of tariff and nontariff barriers, the
harmonization of trade rules, the liberalization of restrictions on services and foreign
investment, the enforcement of intellectual property rights, a dispute settlement
process, regional labor laws and standards, and strengthened environmental
standards.
A. Rules of Origin and Regional Content
NAFTA’s rules of origin require that at least 50 percent of the net cost of most
products originate within the region if those products are to be eligible for the
more liberal tariff conditions within the bloc.
B. Special Provisions of NAFTA
The NAFTA is a unique sort of trade agreement in that it also addresses two side
issues: (i) regional labor laws and standards and (ii) strengthened environmental
standards.
C. Impact of NAFTA
While trade amongst the NAFTA members has increased significantly, the in-
vestment and employment pictures are less clear. Although some investment
funds have been flowing out of Mexico since the maquiladora plants were
stripped of their duty-free status in 2001, other investment funds have been
flowing into Mexico from countries such as Germany and Japan, and from
companies such as Wal-Mart, which is now the largest employer in Mexico.
Further, illegal immigration continues to be a problem in the United States, as
Mexican workers illegally cross the border in their search for work.
D. NAFTA Expansion
Representatives from 34 North, Central, and South American countries continue
to negotiate in an attempt to create the Free Trade Agreement of the Americas
(FTAA). Although the war on terror has slowed that effort, Canada and Mexico
have both entered into free trade agreements with Chile. Further, Mexico
entered into a free trade agreement with the EU on July 1, 2001; all tariffs on
their bilateral trade will end by 2007.
E. Implications of NAFTA for Corporate Strategy
The existence of NAFTA is causing firms from all three member countries to re-
examine their trade and investment strategies. A number of industries (e.g.,
automotive products and electronics) already view the region as one large
market and have rationalized their production processes, products, and financing
accordingly. Although much low-end manufacturing has moved south to
Mexico, more sophisticated manufacturing and services operations are

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 increasing in the United States. In addition, Canadian firms along the U.S.-
Canadian border are generating more competition for U.S. firms along their
mutual border than are Mexican firms along the U.S.-Mexican border. Further,
as Mexican incomes have continued to rise, Mexican demand for Canadian- and
U.S.-sourced products has increased as well. Finally, it should also be noted
that since China’s admission to the WTO in 2002, competition for investment
and markets across the entire NAFTA region has shifted significantly.

VII. REGIONAL EONOMIC INTEGRATION IN THE AMERICAS

Although there are six major regional economic groups in the Americas [see Maps
8.2 and 8.3], regional integration in Latin America has not been particularly
successful, because many countries rely more on the United States for trade than on
members of their own groups. The Caribbean Community and Common Market
(CARICOM) and the Central American Common Market (CACM) are both found in
Central America. The two major blocs in South America are the Andean
Community (CAN) and the Southern Common Market (MERCOSUR). In addition,
the Latin American Integration Association (LAIA) encompasses 10 South American
countries, plus Mexico and Cuba. The primary reason for each of these groups
entering into collaboration is market size. The largest of the groups, MERCOSUR,
is comprised of Brazil, Argentina, Paraguay, and Uruguay; it generates 80 percent of
South America’s GNI and has signed free trade agreements with Bolivia and Chile.
In 2004 the members of the Andean Community (CAN), MERCOSUR, and other
South American countries attempted to launch the 12-nation South American
Community of Nations (CSN). However, its prospects for success are questionable
as the participation of several countries is at best lukewarm.

VIII.REGIONAL ECONOMIC INTEGRATION IN ASIA

Regional economic integration has not been as successful in Asia as in the EU or the
NAFTA region because most Asian countries have relied on U.S. and European
markets for their exports. The Association of Southeast Asian Nations (ASEAN)
was first organized in 1967. [See Map 8.4.] On January 1, 1993, it officially formed
the ASEAN Free Trade Area (AFTA) for the purpose of cutting tariffs on inter-
regional trade to a maximum of 5% by 2008. Comprised of Brunei, Cambodia,
Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and
Vietnam, ASEAN holds great promise for market and investment opportunities
because of its large market size.
The Asia Pacific Economic Cooperation (APEC) community was founded in
1989 to promote multilateral economic cooperation in trade and investment in the
Pacific Rim. Comprised of 21 countries that border the Pacific on both the east and
the west, APEC leaders have committed themselves to achieving free and open trade
in the region by 2010 for the industrial nations and by 2020 for the remaining
member countries. However, progress toward free trade is hampered by the number
of members, the geographic distances between nations, and the lack of a binding
treaty. Nonetheless, because APEC includes more than half of the world’s
population and approximately 60 percent of its GNI, it has enormous potential to
become a significant economic bloc.

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IX. REGIONAL ECONOMIC INTEGRATION IN AFRICA
There are several regional trade groups in Africa that are registered with the WTO,
including the Southern Africa Development Community (SADC), the Common
Market for Eastern and Southern Africa (COMESA), the Economic and Monetary
Community of Central Africa, and the West African Economic and Monetary Union
(WAEMU). With the notable exception of South Africa, markets are small, and
many nations rely more on trade links with former colonial powers than with each
other. Created in 2002 by 53 African nations, the African Union took the place of
the Organization of African Unity (OAU) and focuses its energy and resources on (i)
political issues in Africa (notably colonialism and racism) and (ii) the pursuit of
market liberalization and economic growth in Africa.

POINT—COUNTERPOINT: Is CAFTA a Good Idea?

POINT: The Central American Free Trade Agreement (CAFTA) will link the United
States, Costa Rica, El Salvador, Guatemala, Nicaragua, and the Dominican Republic via
a free trade agreement. It will open the door for increased trade between the United
States and the region, and it will stimulate economic growth in Central America by
encouraging foreign direct investment, offering shorter international supply chains, and
encouraging political reform in an area historically plagued by dictatorships and civil
wars. Further, the growth that CAFTA will foster in Central American industries will
directly benefit those U.S. exporters whose products are used in their production
processes.

COUNTERPOINT: CAFTA is not a good idea because of the vastly different interests
among countries. Opening the market won’t help U.S. agriculture, which actually needs
an increase in world market prices; Central American economies are too small to affect
prices. Further, given its balance of payments deficit, the United States can’t tolerate
many more imports. CAFTA is also a bad move for labor and workers’ rights because it
will trigger the loss of manufacturing jobs in the United States and the loss of agricultural
jobs in Central America. Finally, stringent intellectual property clauses included in the
agreement threaten access to affordable life-saving medicine in the Central American
nations.

X. COMMODITY AGREEMENTS
A commodity agreement is designed to stabilize the price and supply of a primary
commodity such as petroleum, natural gas, coffee, cocoa, tea, or sugar because both
long-term trends and short-term fluctuations in their prices have important
consequences for the world economy.
A. Producers’ Alliances and ICCAs
While producers’ alliances represent exclusive membership agreements
between or among producing countries (a cartel), international commodity

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 control agreements (ICCAs) represent agreements between or among
producing and consuming countries. A notable example of the former is the
Organization of Petroleum Exporting Countries (OPEC); examples of the latter
are the International Cocoa Organization (ICO) and the International Sugar
Organization (ISO). ICCAs may attempt to control prices by stockpiling buffer
stocks, imposing a quota system, or providing special services for member
countries. Under a buffer stock system, an organization buys or sells a
commodity for the purpose of minimizing price fluctuations, but under a quota
system, producing countries divide total output and sales in order to control the
price. The effecttivenesseffectiveness of any agreement depends upon the
particular commodity involved, the availability of close substitutes, and the
willingness of members to comply with their allotted quotas.
B. The Organization of Petroleum Exporting Countries (OPEC)
The Organization of Petroleum Exporting Countries (OPEC) represents a
producer cartel, i.e., a group a commodity-producing countries with significant
control over output and price. Currently OPEC’s oil exports represent about
48.7 percent of the oil traded internationally. Member countries include Algeria,
Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United
Arab Emirates, and Venezuela. OPEC controls prices by establishing
production quotas on member countries. Because of the importance of
commodities to the production process, it is critical that managers understand
the factors that influence their prices.

LOOKING TO THE FUTURE:

Will the WTO Overcome Bilateral and Regional Integration Efforts?

Although the objective of the WTO is to reduce barriers to trade in goods, services, and
investment, regional groups do that and more. Regional economic integration deals with
the specific problems facing member countries, while the WTO concerns itself with trade
issues facing the world as a whole. As a result, regional integration, which is more
flexible, may help the WTO achieve its objectives as the process leads to the
liberalization of issues not covered by the WTO. Regional economic integration can also
serve to lock in trade liberalization across developing countries. Although the EU and
NAFTA are the key regional groups in which significant integration has occurred, both
Russia and China will surely be key countries to add to the future mix, whether they
become active participants in the regional integration process or not.

CLOSING CASE: Wal-Mart de Mexico

Because of its sheer size and volume purchases, as well as its unique distribution system,
Wal-Mart has been able to reduce its prices so successfully that in 2001, it became the
largest company in the world. Wal-Mart first entered the Mexican market in 1990; by
2004 it had become Mexico’s largest retailer. Mexico’s retail sector has greatly benefited

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from the increasing trade liberalization under NAFTA, as well as the improvements to its
transportation infrastructure encouraged by NAFTA. In addition, NAFTA improved
opportunities for foreign investment in Mexico. One of the country’s largest retail
chains, Comercial Mexicana S.A. (Comerci), has found it increasingly difficult to remain
competitive since Wal-Mart’s aggressive entry into its market. Wal-Mart’s strong
operating presence and low prices since the lifting of tariffs under NAFTA have put such
strong competitive pressures on Comerci that it must now decide whether its participation
with the recently formed purchasing consortium, Sinergia, will be sufficient for its
survival.

Questions

1. How has the implementation of NAFTA affected Wal-Mart’s success in Mexico?

The NAFTA has facilitated Wal-Mart’s success in Mexico in various ways. First, it
reduced tariffs on American-sourced goods from 10% to 3%. Second, it encourages
Mexico to improve its transportation system and infrastructure, thus helping solve
Wal-Mart’s logistical problems. Third, it eases restrictions on foreign direct
investment; as a result, many of Wal-Mart’s foreign suppliers have built plants in
Mexico, where they can better serve the whole of the NAFTA region.

2. How much of Wal-Mart’s success is due to NAFTA, and how much is due to Wal-
Mart’s inherent competitive strategy? In other words, could any other U.S. retailer
have the same success in Mexico post-NAFTA, or is Wal-Mart a special case?
The same benefits that have accrued to Wal-Mart following the implementation of
the NAFTA are also available to other competitors. However, Wal-Mart uses its
sheer size and volume of purchases to negotiate prices to rock-bottom levels that are
not available to smaller competitors. It also works closely with suppliers on
inventory levels, using an advanced information system that informs suppliers when
additional merchandise will be needed, thus allowing them to plan production runs
more accurately and pass along the captured cost reductions. Then, rather than
pocketing the accrued cost savings, Wal-Mart reduces its prices. Retailers who wish
to compete with Wal-Mart will either have to meet Wal-Mart’s prices or position
themselves in a different segment of the market.

3. What has Comerci done in its attempt to remain competitive? What are the
advantages and challenges of such a strategy, and how effective do you think it will
be?
Comerci has attempted to lower its prices, but for many items, it simply lacks the
negotiating power with its suppliers to get prices as low as Wal-Mart’s. Faced with
extinction, Comerci has banded together with two other Mexican supermarket
chains, Soriana and Gigante, to form a purchasing consortium (Sinergia) that allows
them to jointly negotiate better bulk prices from suppliers. To prevent pricefixing
and monopolistic behavior, Mexico’s Federal Competition Commission (CoFeCo)
requires that Sinergia issue regular reports regarding the nature of its purchasing

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 agreements and that it sign confidentiality agreements with the participating retailing
chains. As a representative body with no assets, Sinergia’s purchases are currently
limited to local suppliers; its future is uncertain. Whether students feel that such a
strategy will be effective or not will depend on the perspective they take. If they
focus primarily on costs, they may be of the opinion that the strategy will be
sufficient. If, however, they are also concerned about issues such as product and
store differentiation and the regulatory role of government, then they may be of the
opinion that it is insufficient.

4. What else do you think Comercial Mexicana S.A. should do, given the competitive
position of Wal-Mart?
Comercial Mexicana is considering three basic options as it tries to survive in the
new competitive environment driven by the presence of Wal-Mart in Mexico:
remaining independent, merging with a local retail chain, or merging with a foreign
retail chain. First, the firm needs to carefully examine the market and determine (a)
ways in which it can differentiate itself from Wal-Mart (such as Target’s slightly
upscale market approach) and (b) whether it possesses or at least has access to
sufficient assets to survive in the current environment. As part of that decision-
making process, Comercial Mexicana also needs to consider both the available
sourcing and market opportunities it enjoys, given its location within the NAFTA
region. Finally, it should assess (a) what it can offer and (b) what it would desire
from a local or foreign partner. With that information in hand, Comercial Mexicana
will be in a better position to make effective operating decisions.

WEB CONNECTION

Teaching Tip: Visit www.prenhall.com/daniels for additional information and

links relating to the topics presented in Chapter Eight. Be sure to refer your students
to the online study guide, as well as the Internet exercises for Chapter Eight.

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 _________________________
CHAPTER TERMINOLOGY:
economic integration, p.269
global integration, p.269
bilateral integration, p.269
regional integration, p.269
World Trade Organization (WTO),
p.269
General Agreement on Tariffs and
Trade (GATT), p.269
most-favored-nation clause (MFN),
p.269
normal trade relations (NTR), p.271
bilateral agreement, p.272
preferential trade agreement (PTA),
p.272
free trade agreement (FTA), p.272
regional trade agreement (RTA),
p.272
customs union, p.273
common market, p.273
static effects, p.273
dynamic effects, p.273
trade creation, p.273
trade diversion, p.273
economies of scale, p.274
European Union (EU), p.274
European Economic Community
(EEC), p.274
European Free Trade Association
(EFTA), p.274
European Community (EC), p.274
European Commission, p.276
European Council, p.276
Council of Ministers, p.276
European Parliament, p.277
European Court of Justice, p.277
Single European Act of 1987, p.277
Euro, p.277
Treaty of Maastricht of 1992, p.277
_________________________
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European Economic Area (EEA),
p.279
Common Agricultural Policy
(CAP), p.282
North American Free Trade
Agreement (NAFTA), p.283
maquiladora, p.285
Free Trade Agreement of the
Americas (FTAA), p.286
Caribbean Community and
Common Market
(CARICOM), p. 287
Central American Common Market
(CACM), p.287
Latin American Integration
Association (LAIA), p.287
South Common Market, p. 287
(MERCOSUR), p.288
Andean Community (CAN), p.289
South American Community of
Nations (CSN), p.289
Association of Southeast Asia
Nations (ASEAN), p.291
ASEAN Free Trade Area (AFTA),
p.291
Asia Pacific Economic Cooperation
(APEC), p.292
African Union, p.294
commodity agreement, p.294
producers’ alliances, p.294
international commodity control
agreement (ICCA), p.294
buffer stocks, p.294
quota system, p.295
Organization of Petroleum
Exporting Countries (OPEC),
p.296
ADDITIONAL EXERCISES: The Economic Integration Process

Exercise 8.1. In 1998 the World Trade Organization issued a ruling in which it
stated that the U.S. was wrong to prohibit shrimp imports from countries that failed
to protect sea turtles from entrapment in the nets of shrimp boats. The basic position
of the WTO was that while environmental considerations are important, the primary
aim of international trade agreements is the promotion of economic development
through unfettered free trade. Ask students to debate the position of the WTO in
decoupling trade and environmental policy.

Exercise 8.2. Ask students to compare the foreign market entry strategies of
exporting, licensing, and foreign direct investment in (a) a free trade area, (b) a
customs union, and (c) a common market. What barriers and incentives do they
expect to encounter? (Be sure students assume the perspective of a firm located
outside of the regional bloc.)

Exercise 8.3. Prior to the breakup of the U.S.S.R., COMECON (also known as the
Council for Mutual Economic Assistance (CMEA)) held the Soviet bloc together
economically. It represented a trade association that existed to help fulfill the output
goals of the central planning authorities of Russia and its satellite nations. Ask
students to discuss the reasons they believe that COMECON disintegrated in a post-
Soviet environment.

Exercise 8.4. Ask students to consider the major geographic areas of the world:
Europe, Asia (including Oceania), Africa, South America, and North America. Then
have them speculate about the extent to which they expect regional economic
integration to progress in each of those areas (a) in 10 years and (b) in 25 years time.
Finally, ask them to discuss the extent to which they expect global economic
integration to progress during the next 25 years. Which organization(s) do they
expect will play a major role in that process?

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