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MGT520 - International Business - Lecture Handout 40

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REGIONAL AND ECONOIC INTEGRATION

The Euro

Prior to the implementation of the Euro (the single European currency), member countries moved to converge their economies by

  • Reducing inflation so that each country’s inflation would be no more than 1.5 percentage points above the average of the three lowest inflation rates in Europe
  • Reducing long-term interest rates so that each country’s rate would be no more than two percentage points above the average of the three lowest.
  • Reducing the government’s budget deficit to no more than 3.5% of GDP
  • Reducing the stock of public debt so that it would not exceed 60% of GDP.

Eleven countries adopted the Euro as of January 1999. The Euro will show up as an actual bank note (replacing individual currencies) in 2002. It is already widely used for a variety of no cash transactions.

Implications of the EU:

Although Europe is moving closer together through the Euro and the Single Market program, it is still not as homogenous as the U.S. market. Differences in languages, cultures, and governments still splinter Europe, and the eventual addition of new countries will create even more divisions in the market. Companies need to develop a pan-European strategy without sacrificing different national strategies.

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MGT520 - International Business - Lecture Handout 29

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THE GENERAL AGREEMENT ON TARIFFS AND TRADE AND THE WTO:

The General Agreement on Tariffs and Trade (GATT) is a multilateral treaty designed to minimize trade barriers. GATT went into effect in 1948. It provided a forum for trade ministers to discuss policies and problems of common concern. GATT’s mission was adopted by the World Trade Organization (WTO), which replaced GATT in 1995.

The Role of the General Agreement on Tariffs and Trade:

  • The goal of GATT was to promote a free and competitive trading environment that benefits efficient producers. To that end, GATT sponsored international negotiations, called “rounds,” to reduce trade barriers (both tariff and nontariff). GATT successfully oversaw a reduction of tariffs from an average of over 40% in 1948 to approximately 3% today, and promoted a dramatic increase in world trade.
  • To ensure that international trade is conducted on a nondiscriminatory basis, GATT follows the most favored nation (MFN) principle which requires one nation to treat a second nation no worse than it treats any third nation. Any preferential treatment that is extended to one country must be extended to all countries. Thus, the principle implies multilateral rather than bilateral trade negotiations.

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