Spread Knowledge

MGT520 - International Business - Lecture Handout 38

User Rating:  / 0


The Role of the General Agreement on Tariffs and Trade (GATT):

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 negotiation

The World Trade Organization:

  • The World Trade Organization (WTO) was founded in 1995, and is comprised of 146 member countries and 30 observer countries. The WTO has three primary goals: to promote trade flows by encouraging nations to adopt non-discriminatory and predictable trade policies, to reduce remaining trade barriers through multilateral negotiations, and to establish impartial procedures for resolving trade disputes among members.
  • Problem Sectors: One challenge facing the WTO is dealing with sectors of the economy such as agriculture and textiles that most nations protect. Groups including the Cairns Group (a group of major agricultural exporters) have pressured the WTO to ensure that the Uruguay Round policies dealing with agricultural trade are implemented according to schedule. Similarly, developing countries are monitoring the dismantling of the Multifibre Agreement (MFA), which created a complex array of quotas and tariffs on trade in textiles and apparel.
  • The General Agreement on Trade in Services (GATS): The WTO is also focusing on reducing barriers to trade in services. One approach currently in use is the principle of national treatment, in which a country treats foreign firms the same as it treats domestic firms. The WTO began negotiating a new GATS agreement in 2000, but progress has been slow.

  • Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS): The third challenge for the WTO is intellectual property rights (patents, copyrights, trademarks, and brand names). Efforts to improve intellectual property right protection, agreed upon at the Uruguay round, will be phased in over the space of a decade.
  • In 2001, the WTO launched the Doha round of negotiations. Several contentious issues are slated to be discussed, including agriculture trade, intellectual property rights, and trade in services.
  • Trade-Related Investment Measures Agreement (TRIMS): The TRIMS agreement is a start toward eliminating national regulations on FDI, which may distort or restrict trade. It affects trade balancing rules, foreign exchange access, and domestic sales requirements.
  • Enforcement of WTO Decisions: The WTO, unlike its predecessor GATT, has more power to punish violators of the WTO rules. Most experts feel that the WTO has been successful in implementing its policies during its first years of existence.


  • The European Union (EU) is the most important trading bloc in the world today. Fifteen countries currently “belong” to the EU, making it the world’s richest market, with a total GDP of $7.9 trillion.
  • Ten more countries are slated to join the EU in 2004. .
  • The European Economic Community (EEC) was established at the Treaty of Rome in 1957 by six nations (Belgium, France, Luxembourg, Germany, Italy, and the Netherlands). The goal of the EEC was to create a common market. The name EU was a result of a name change in 1993.

The North American Free Trade Agreement:

The North American Free Trade Agreement (NAFTA) was implemented in 1994 to reduce barriers to trade and investment among Canada, Mexico, and the United States. The agreement was built upon a trade agreement that had been signed between the United States and Canada six years earlier and upon the extensive amount of trade that already existed between the three countries. The agreement will be phased in over a 15-year period.

Free Trade Area

  • A free trade area eliminates all barriers to trade among member countries, but allows each country to establish its own external trade barriers. The North American Free Trade Area (NAFTA) is an imperfect example of a free trade area.
  • A problem with free trade areas is the potential for trade deflection whereby non-member countries try to avoid trade barriers by initially exporting their products to a member country with low trade barriers, then re-exporting the products to a member country with high trade barriers.
  • Most free trade agreements specify rules of origin, which detail the conditions under which a good is classified as a member or non-member good to try to prevent trade deflection.

Customs Union:

A customs union combines the elimination of barriers to internal trade among member countries with the adoption of common external trade policies toward non-members. Trade deflection is not an issue in a customs union since member countries treat non-members in a uniform manner. A current example of a customs union is the Mercosur Accord, an agreement between Argentina, Brazil, Paraguay, and Uruguay

Economic Union:

An economic union eliminates trade barriers between member countries, establishes a common external trade policy, follows a policy of factor mobility, and coordinates economic policies of member countries. An example of an economic union is the Belgium-Luxembourg Economic Union. In addition, the European Union is currently moving toward economic union status.

Political Union:

  • A political union combines the elements of an economic union with the added feature of complete political integration. The United States, transformed from 13 separate colonies into one, is an example of a political union.
  • 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.
  • 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.

Related Content: MGT520 - VU Lectures, Handouts, PPT Slides, Assignments, Quizzes, Papers & Books of International Business