Transcript 1. Intertwined World Economy

GLOBAL ECONOMIC
ENVIRONMENT
CHAPTER OVERVIEW
Intertwined World Economy
Country Competitiveness
Evolution of Cooperative Global Trade Agreements
Information Technology and the Changing Nature of
Competition
Regional Economic Arrangements
Introduction
• In 2005, the annual global trade in goods and
services amounted to $12.5 trillion.
• Daily international financial flows now exceed $1.9
trillion.
• From 1990 to 2004, world GDP grew some 40
percent.
• In the same period, total world exports of
merchandise and services increased by almost
120 percent.
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Introduction
• The net result of these factors has been the
increased interdependence of
countries/economies and increased
competitiveness and the concomitant need
for firms to keep a constant watch on the
international economic environment.
• Consumers and companies in the U.S. and
Japan tend to be able to find domestic
sources for their needs since their economies
are diversified and extremely large.
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1. Intertwined World Economy
• Despite the increasingly intertwined world
economy, the United States is still relatively
more insulated from the global economy than
other nations. In 2004, the U.S. economy was
about $11.7 trillion and imports about 80%
more as it exports.
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1. Intertwined World Economy
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1. Intertwined World Economy
• The larger the country’s domestic economy,
the less dependent it tends to be on exports
and imports relative to its GDP.
• Intertwining of economies by the process of
specialization due to international trade leads
to job creation in both the exporting and
importing country.
• Foreign direct investment (FDI) involves
investment in manufacturing and service
facilities in a foreign country.
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1. Intertwined World Economy
• As firms invest in manufacturing and
distribution facilities outside their home
countries to expand into new markets around
the world, they have added to the stock of
foreign direct investment.
• The increase in foreign direct investment has
also been promoted by the efforts of many
national governments to woo multinationals.
• Portfolio investment or indirect investment
refers to investments in foreign countries that
are withdrawable at short notice, such as
investments in foreign stocks and bonds.
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1. Intertwined World Economy
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1. Intertwined World Economy
• The weekly volume of international trade in
currencies exceeds the annual value of the
trade in goods and services.
• All nations with even partially convertible
currencies are exposed to the fluctuations in
the currency markets.
• A rise in the value of the local currencies
make exports more expensive; a rising
currency value also deters foreign investment
in a country and may encourage outflow of
investment.
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1. Intertwined World Economy
• Examples of severe currency fluctuations are
the 1995 Mexican meltdown, and the Asian
financial crisis (1997-1999).
• Unfortunately, the influence of these shortterm money flows are nowadays far more
powerful regarding exchange rates than an
investment by a Japanese or German
automaker.
• Recent examples of financial crisis occurred
in Argentina and Brazil (2002).
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2. Country Competitiveness
• Country competitiveness refers to the
productiveness of a country, which is
represented by its firms’ domestic and
international productive capacity.
• Country competitiveness is not a fixed thing.
• The role of human skill resources has
become increasingly important as a primary
determinant of industry and country
competitiveness
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2. Country Competitiveness
• The World Economic Forum’s Global
Competitiveness Report of 2005-6 placed two
Asian Tigers (Taiwan and Singapore) among
the world’s top 10 economies along with
Finland, the United States, Sweden,
Denmark, Iceland, Switzerland, Norway, and
Australia (see Exhibit 2-4).
• Although the United States and Switzerland
have been the most innovative in the last
three decades, other OECD countries have
been increasingly catching up.
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2. Country Competitiveness
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2. Country Competitiveness
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3. Evolution of Cooperative Global
Trade Agreements
•
ITO (International Trade Organization):
•
•
ITO was established after World War II.
GATT (General Agreements on Tariffs &
Trade):
•
•
•
After 1950, GATT succeeded ITO.
The main operating principle of GATT was the
concept of most favored nations (MFN).
GATT was successful in lowering trade barriers.
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3. Evolution of Cooperative Global
Trade Agreements
•
WTO (World Trade Organization Trade):
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The eighth and last round of GATT talks – called
the “Uruguay Round” (1986-1994) established
an international body called the WTO which took
effect on January 1, 1995.
As of February 16, 2005, WTO had 148 member
countries.
WTO has statutory powers to adjudicate trade
disputes among nations and has its own
secretariat.
WTO is the new legal and institutional foundation for
a multilateral trading system.
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3. Evolution of Cooperative Global
Trade Agreements
•
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WTO’s ninth round---called the “Doha
Development Agenda” (Doha Round) was
launched in Doha, Qatar in November 2001
(see Exhibit 2-5). Interim deal in December
2005 to end farm export subsidies by 2013
prevented collapse of the latest round of the
talks.
The Doha Round of 2001 facilitated the way
for China and Taiwan to get full
membership in the WTO.
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3. Evolution of Cooperative
Global Trade Agreements
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3. Evolution of Cooperative Global
Trade Agreements
• Although WTO is a global institutional
proponent of free trade, it is not without
critics.
• The WTO dispute settlement mechanism is
faster, more automatic, and less susceptible
to blockages than the old GATT system.
• The WTO Work Program on Electronic
Commerce is in the process of defining the
trade-related aspects of electronic commerce
that would fall under the parameters of WTO 19
mandates.
4. Information Technology and the
Changing Nature of Competition
• Information technology and the changing
nature of competition have created many
challenges for the firms.
• Over the Internet, any piece of electronically
represented intellectual property can be
copied.
• The Trade Related Aspects of Intellectual
Property Rights (TRIPS) Agreement was
concluded as part of the GATT Uruguay
Round. Update to accord ensuring patent
protection does not block developing
countries’ access to affordable medicines is 20
the top of the agenda.
4. Information Technology and
the Changing Nature of
Competition
• Proliferation of E-Commerce and
Regulations: Countries’ regulators have not
kept pace with the rapid proliferation of
international e-commerce and Internet-related
activities.
• In many countries, rules and regulations are
vague regarding e-commerce transactions.
• The United Nations Commission on
International Trade Law (UNCITRAL) has
formed a Working Group on Electronic
Commerce to reexamine these treaties.
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5. Regional Economic
Arrangements
• An evolving trend in international economic
activity is the formation of multinational trading
blocs.
• There are over 120 regional free trade areas
worldwide.
• Market groups take many forms, depending on
the degree of cooperation and inter-relationships,
which lead to different levels of integration
among the participating countries.
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5. Regional Economic
Arrangements
• Types of Regional Economic Arrangements:
• Free Trade Areas: Formal agreement among two or
more countries to reduce or eliminate customs duties
and nontariff barriers. Examples: NAFTA,
MERCOSUR, CAFTA-DR & FTAA (proposed and
currently stalled)
• Customs Union: Addition of common external tariffs to
the provisions of free trade agreements. Example:
ASEAN.
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5. Regional Economic
Arrangements
• Common Market: Eliminates all tariffs and other barriers,
adopts a common set of external tariffs on nonmembers, and
remove all restrictions on the flow of capital and labor among
member nations. Example: European Union.
• Monetary Union: Represents the fourth level of integration with
a single currency among politically independent countries.
Example: EU and the euro.
• Political Union: Highest level of integration resulting in a
political union. Sometimes, countries come together in a loose
political union for historical reasons, as in the case of the
British Commonwealth which exists as a forum for discussion
and common historical ties.
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