MGT520 - International Business - Lecture Handout 40

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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.


Trade negotiators also made an effort to prevent the establishment of screwdriver plants (factories in which very little transformation of the product is undertaken) in Mexico as a means of evading U.S. and Canadian tariffs by developing detailed rules of origin defining whether a good should qualify for preferential tariff treatment or not. The text provides an example of how such a situation might occur in the auto industry.

Impact of NAFTA on Trade, Investment, and Jobs:

Mexico’s trade with the United States and Canada has grown since NAFTA. The Mexican peso crisis of 1994 temporarily slowed U.S. exports to Mexico. Mexico appears to be receiving more FDI from Europe as a result of NAFTA. As far as employment goes, it is virtually impossible to determine the employment impact of NAFTA because of the difficulty of trying to separate NAFTA from other factors.

Implications of NAFTA:

The integration of the U.S., Canadian and Mexican economies creates challenges and opportunities for MNEs. They can now rationalize their production throughout North America, and have free access to the North American market. However, they must adhere to strictly enforced local content laws. Mexico has become a more attractive investment option, both in terms of the duty-free access that Mexican-produced goods enjoy in the United States and in terms of the Mexican market as a consumption force in its own right.

ANCOM, the Andean Common Market, is the second most important regional group in South America. The Andean Pact was established in 1969 to promote free trade among Bolivia, Chile, Colombia, Ecuador, and Peru. The objective of the agreement was to make these small nations competitive with the continent’s larger countries. Membership has changed over the years (Venezuela joined in 1973 and Chile dropped out in 1976), and at least for the first twenty years, the agreement was not successful.
The Mercosur Accord is an agreement between Argentina, Brazil, Paraguay, and Uruguay to cut internal tariffs and establish common external tariffs. The agreement is expected to revitalize the stagnating economies of Brazil and Argentina by stimulating new flows of FDI.
Response to Mercosur by businesses has been mixed. Some have quickly taken positions that allow them to capitalize on the opportunities created by the accord, while others fear an influx of cheaply made products will make it more difficult to compete. See Chapter 2’s closing case for an update on Argentina.

Trade Agreements in the Asia-Pacific Region/Other regional agreements:

The Australia-New Zealand Agreement: The Australia-New Zealand Closer Economic Relations Trade Agreement (known as CER), took effect in 1983. Its goal is to expand trade and straighten links in a diverse set of areas including investment, marketing, tourism, and transport. Most analysts agree that it has been highly successful. The Association of South East Asian Nations (ASEAN) was founded in 1967 by Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand to promote regional political and economic cooperation. The ASEAN Free Trade Area was established to promote intra-ASEAN trade. Other Free Trade Agreements in the Americas: Other free trade agreements are currently being negotiated. Mexico in particular has been active in that respect, negotiating an agreement with Chile, an agreement with Venezuela and Colombia, and an agreement with five of its Central American neighbors.

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