Chapter 6

International Economic
Organizations and Integration
 Do You Know?

• Why have world markets become more

integrated today? How has this
integration taken place?
• Why did the U.S. push hard to form
NAFTA?
• What roles do the WTO, the World
Bank, and IMF play in the world
economy? Are they clubs of rich
nations?
 Do You Know?

• Why do people debate whether regional

blocs are compatible with globalization?
• If you are an export manager in an
Australian company, would you like to
see the advent of more blocs in other
regions?
• How should MNEs strategically respond
to regional integration?
International Economic Integration

• Economic integration is a new reality in

the international business market.
• Business and governments have
created a range of institutions, treaties,
and agreements that help to
– Overcome trade differences
– Boost the free movement of trade,
investment, and services across national
boundaries
International Economic Integration

• Economic integration is concerned

with:
– The removal of trade barriers or
impediments between at least two
participating nations
– The establishment of cooperation and
coordination between them
• Integration creates high levels of
globalization and regionalization.
International Economic Integration
• Free Trade Area - removes trade impediments
among member nations. (NAFTA )
• Customs Union - adds common external economic
initiatives to all member nations. (Central American
Common market)
• Common Market - allows free trade of products and
services and also allows free mobility of production
factors like capital, labor and technology.
• Economic Union - is a common market with
unification of all monetary and fiscal policies.
(European Union)
• Political Union - is where participating nations
literally become one nation in an economic and
political sense, with common parliament and political
institutions.
 International Economic Integration

Exhibit 6-1: Forces stimulating international economic integration

Global-Level Cooperation Among
Nations
• The World Trade Organization (WTO),
the World Bank, and the International
Monetary Fund (IMF) are three
fundamental institutions affecting global
cooperation of nations.
• The IMF and World Bank serve as a
financial base for cooperation.
• The WTO serves as the institutional
foundation of the world trading system.
The World Trade Organization (WTO)

• A multilateral trade organization aimed

at international trade liberalization.
• Came into being in 1995, after a 48 year
development that started with trade
negotiations at the Geneva Conference
in 1947
• Is a relative of the original International
Trade Organization that was proposed
there.
• Successor organization to GATT.
The World Trade Organization (WTO)

Exhibit 6-2: Multilateral negotiations under GATT

The World Trade Organization (WTO)

• The WTO seeks to establish trade policy rules

that help expand trade and improve world
living standards. It does this through:
– Administering Trade Agreements.
– Serving As The Forum For Trade Negotiations.
– Settling Trade Disputes.
– Reviewing National Trade Policies.
– Assisting Developing Nations On Trade Policy
Issues.
– Cooperating With Other International
Organizations
The World Trade Organization (WTO)

• In January of 2003, the WTO had 146

members accounting for over 95% of
world trade.
• More than 30 applicants are negotiating
to become members.
• Russia is not yet a member, neither is
Vietnam nor the Bahamas.
• China is a member, so is Cuba.
The World Trade Organization (WTO)
• WTO Functions:
– Reduce import duties.
– Eliminate trade discrimination through most
favored nation (treating everyone equally) and
national treatments (where all products are
considered “domestic” once they cross national
borders).
– Combat protection and trade barriers
• Dumping – the sale of imported goods either at prices
below what a company charges in home market or below
cost
– Provide forums for dealing with trade issues.
– Provide dispute resolution services for members.
The World Trade Organization (WTO)

• Bilateral and regional customs unions

and common markets.
• Lowered tariffs to developing nations
without violating antidiscrimination rules.
• Establishment of a Generalized System
of Preferences for developing nations.
• Escape clauses, so that new members
can protect infant industries.
The International Monetary Fund (IMF)

• The IMF was established on December

27, 1945 with 29 countries and which
began financial operations on March 1,
1947, is the result of the Bretton Woods
Conference of nations held in 1944 to
discuss the major international
economic problems, including
reconstruction of the economies
ravaged by the World War II, and to
evolve practical solutions for them.
The International Monetary Fund (IMF)

• The IMF seeks to:

– Promote international monetary
cooperation and expansion of international
trade
– Reduce inequity in member nations’
balances of payments.
• Key institution in the international
monetary system
• Helps members defend their currencies
against cyclical, seasonal, or random
currency fluctuations.
The International Monetary Fund (IMF)

• The IMF seeks to establish sound

monetary practices among member
nations it does this through:
– Promoting exchange stability
– Maintaining orderly exchange
arrangements
– Helping members avoid serious exchange
depreciations
– Placing reserves at the disposal of member
nations who are in financial crisis, subject
to safeguards and repayment
The International Monetary Fund (IMF)
• In May 2008, the IMF had 185 members
accounting for over 95% of currency
exchange.
• The IMF is headed by a Board of Governors,
which is composed of representatives of all
member nations.
• The IMF requires all members to cooperate
with the Fund in order to promote a stable
exchange rate system.
• Largest members: United States, United
Kingdom, Japan, Germany, France (and 155
others).
The International Monetary Fund (IMF)

• The IMF allows:

– Special Drawing Rights (SDRs), which
are a unit of account and allow countries to
peg their currencies against the five largest
IMF members.
– IMF members settle transactions with SDR
for exchanges among themselves.
 IMF Facilities
• Poverty Reduction and Growth Facility (PRGF)
– Enhanced structural adjustment facility (ESAF)
• Stand-By Arrangements (SBA):
– The SBA is designed to address short-term balance of
payments problems and is the most widely used facility of the
IMF. The length of a SBA is typically 12-18 months. Repayment
is normally expected within 2.25-4 years.
• Extended Fund Facility (EFF):
– The facility was established in 1974 to help countries address
more protracted balance of payments problems with roots in
the structure of the economy. Arrangements under the EFF are
thus longer (3 years). Repayment is normally expected within
4.5-7 years.
 IMF Facilities (Cont.)
• Supplemental Reserve Facility (SRF)
– The SRF was introduced in 1997 to meet a need for very
short-term financing on a large scale. The sudden loss of
market confidence experienced by emerging market
economies in the 1990s led to massive outflows of capital,
which required loans on a much larger scale than anything
the IMF had previously been asked to provide. Countries are
expected to repay loans within 1-1.5 years.
• Contingent Credit Lines (CCL)
– The CCL differs from other IMF facilities in that it aims to
help members prevent crisis, established in 1999, it is
designed for countries implementing sound economic
policies, which may find themselves threatened by a crisis
elsewhere in the world economy- a phenomenon known as
‘financial contagion’.
 IMF Facilities (Cont.)

• Compensatory Financing Facility (CFF)

– The CFF was established in the 1960s to assist
countries experiencing either a sudden shortfall in
export earnings or an increase in the cost of cereal
imports caused by fluctuating world commodity
prices.
• Emergency Assistant
– The IMF provides emergency assistance to
countries that have experienced a natural disaster
are emerging from conflict. Emergency loans are
subject to the basic rate of charge and must be
repaid within 3.25-5 years.
 The World Bank Group
• The World Bank is formally known as the
International Bank for Reconstruction and
Development (IBRD).
• It is tied with three affiliates
– The International Development Association (IDA)
– The International Finance Corporation (IFC)
– The Multilateral Investment Guarantee Agency
(MIGA).
• Their common objective is to help raise
standards of living in developing nations by
channeling financial resources to them from
developed countries.
 The World Bank Group
• The World Bank is owned by the
governments of 160 nations.
• Its capital is provided by subscription, and it
finances its operations primarily through world
capital markets.
• It is also financed by interest payments from
borrower nations.
• Loans are geared toward advanced
developing nations and must be used for
productive purposes like financing
infrastructure, telecommunications, ports and
power.
 The World Bank Group

• The IDA concentrates on productive

project in the least developed nations.
• The IFC assists in economic
development of maturing countries by
investing in private sector investments.
• The MIGA specializes in encouraging
equity investment and foreign direct
investment to developing countries by
mitigating trade barriers.
 Other International Economic
Organizations
• The Organization for Economic Cooperation and
Development (OECD)
– Aids in the achievement of the highest and soundest
possible growth in economies of member countries
– Promotes economic development, employment
expansion, living standards improvement, financial
stability, and extension of world trade on a multilateral
and nondiscriminatory basis.
• The United Nations Conference on Trade and
Development (UNCTAD)
– A forum for examination of economic problems
plaguing developing countries
– Solves them through negotiations with developed
nations that benefit from trade with them.
 Other International Economic
Organizations
Exhibit 6-3: Summary of specialized international
economic organizations
 Postwar Regional Integration

• A total of 109 agreements were reports

to GATT from 1947 through 1994.
• Features of regional integration:
– Postwar regional integration has centered
in western Europe.
– Many developing countries renewed their
interest in regional integration since the
Uruguay Round began.
– The level of economic integration varies
widely among agreements.
North America: The North American
Free Trade Agreement (NAFTA)
• Established in 1992, implemented in 1994,
NAFTA created a tri-national (Canada, Mexico,
and the United States) market area
– more than 360 million people
– combined annual purchasing power of about $6.5
trillion.
• Dismantles trade barriers for industrial goods,
and has agreements on services, investments,
intellectual property rights, and agriculture.
• Side agreements on labor adjustments,
environmental protection, import surges, child
labor, minimum wages, productivity, and health
and safety standards.
Europe: The European Union (EU)

• Established in 1957 as the European

Economic Community (EEC), it became the
European Community (EC) in 1995.
• It originally had 15 member states.
• In 1992, the Maastricht Treaty created the
European Common Market
– monetary union, establishment of common foreign
and security policy, common citizenship, and
cooperation on justice and social affairs.
• The new name for the EC, after Maastricht, is
the European Union.
 Europe: The European Union (EU)
Exhibit 6-4:
The
European
Union
Europe: The European Union (EU)

∙ Creates the common European Currency,

the ECU, or Euro.
∙ Gives every citizen in member states a
European Passport and free movement
from one country to another within the EU.
∙ Contains provisions of cooperation in justice
and domestic affairs.
∙ Employs the EU to play a more active role
in trans-European transportation and
environmental protection.
Europe: The European Union (EU)

∙ Increases the power of a European

Parliament to enact legislation.
∙ Removes all restrictions on capital
movements among member states.
∙ Establishes a European Central Bank
responsible for monetary policy
∙ Transforms the EU into the European
Economic and Monetary Union under which
member currencies are tied to one another
at a standard exchange rate.
Europe: The European Union (EU)

• Five EU Institutions
– The European Parliament, elected by the
people of member states.
– The Council of the Union, elected by the
governments of member states.
– The European Commission (an executive
body).
– The Court of Justice, interpretation of the
Law.
– The Court of Auditors, which manages
the EU budget.
 Asia Pacific

• APEC (Asia Pacific Economic Cooperation

Forum) was founded in 1994 and consists of
18 member nations.
• Enhances the progress made in the Uruguay
round of GATT.
• Association of Southeast Asian Nations
(ASEAN) was founded in 1967 by Malaysia,
Indonesia, Philippines, Singapore, and
Thailand.
• The purpose is to promote peace, stability,
and economic growth in the region.
 Asia Pacific
Exhibit 6-5: The Asia-Pacific Economic Cooperation
(APEC)
 Asia Pacific

• Asia accounts for 20% of world trade.

• It has substantial trade liberalization.
• There are less formal agreements bilaterally
and multilaterally in abundance. Examples
are SAARC, and the China Circle.
• It has also created numerous sub-regional
economic trade zones, which are named
transnational export processing zones,
natural economic territories, or growth
triangles.
 Latin America

• Early attempts were the Latin American Free

Trade Association (LAFTA) and the Central
American Common Market (CACM). Both
failed economically and politically.
• LAFTA was superceded by the Latin
American Integration Association (LAIA),
whose goal was to increase bilateral trade
among member nations.
• MERCOSUR was established in 1995 as an
organization to promote trade in South
America.
 Latin America

Exhibit 6-6:
Free trade
blocs in the
Americas
 Africa and the Middle East
• The Economic Community of West African
States (ECOWAS) - Established in 1975 by
west African states
• Central African Economic and Customs
Union (UDEAC) – established in 1966 in
former French Africa
• Preferential Trade Area (PTA) – established
1981 from former members of the East
African Economic Community (formed in
British East Africa, dissolved in 1979)
• Gulf Cooperation Council (GCC) – Middle
East free trade area established in 1981
Regionalization vs. Globalization

• Regionalization is a prominent feature in

the world economy today. All WTO
members will also be members of a
regional bloc or agreement.
• Regionalization is compatible with
economic growth and globalization, but
insiders gain many more benefits than
outsiders.
Commodity-Level Cooperation Among
Nations
• Commodity cartel – a group of
producing countries that wish to protect
themselves from the fluctuations in
prices of certain commodities traded
internationally
– Crude oil, coffee, rubber, cocoa
• Can control prices through production
quotas and limiting overall output.
Organization of Petroleum Exporting
Countries (OPEC)
• Inter-governmental organization
consisting of 13 members.
• Strongest collective force impacting
prices in the oil market.
• OPEC members control more than 40%
of the world’s oil production
Organization of Petroleum Exporting
Countries (OPEC)
The Multifiber Arrangement (MFA)

• Agreement countries to control exports

of textiles and apparel from developing
countries to developed countries
• Established in 1972
• Covers about two-thirds of textile and
apparel traded internationally
 Strategic Responses of MNEs
∙ Defensive Export Substituting, where
firms defend market share previously
achieved through exports, by establishing
operations within regions.
∙ Offensive Export Substituting, ensures
market penetration through foreign direct
investment before markets are officially
integrated.
∙ Rationalized Foreign Direct Investment,
where Multinational Enterprises heighten
resource commitment to operations to
achieve new economies of scale in the
wake of regionalization.
 UNIDO (United Nations Industrial
Development Organization)
• On 17 November 1966, the United Nations General
Assembly passed resolution 2152 (XXI), founding
the United Nations Industrial Development
Organization (UNIDO) as an autonomous body
inside the United Nations.
• The United Nations Industrial Development Organization
(UNIDO) is the specialized agency of the United Nations
that promotes industrial development for poverty reduction,
inclusive globalization and environmental sustainability.
 UNIDO
• The Green Industry Initiative, which was launched by
UNIDO in 2009 as the sector strategy aiming to
achieve the overall goals of green growth and green
economy in the manufacturing and associated
sectors, is at the core of UNIDO’s mandate. The
Initiative, through pilot projects, global forums and the
Green Industry Platform, encourages the efficient use
of energy and raw materials in manufacturing
processes and services, therefore creating cleaner
and more competitive industrial development, while
reducing pollution and the unsustainable reliance on
natural resources.
 UNIDO
• “My goal is that
UNIDO provides
concrete and practical
solutions to pressing
global challenges.
Sustainable industrial
development can
deliver a world without
hunger, using
sustainable energy for
productive activities,
and creating jobs,
particularly for young
people.”
 Objectives of UNIDO
• UNIDO’s motto is “Progress through Innovation.” It
promotes innovation for long-term industrial development.
• It assists countries in making digital and green
transformations in their sectors to advance and achieve
long-term goals.
• Its goal is to alleviate hunger and food insecurity. This
includes increasing cooperation and sharing best practices
and technologies for reducing crop losses.
• It seeks to manage climate change by encouraging
renewable energy and lowering greenhouse gas emissions.
This includes supporting various low-carbon practices,
policies, and technology.
 Functions of UNIDO

• UNIDO provides support to its 172

Member States through four mandated
functions:
– technical cooperation;
– action-oriented research and
policy-advisory services;
– normative standards-related activities; and
– fostering partnerships for knowledge and
technology transfer.
 Focus Areas of UNIDO

• UNIDO is concentrated on three focus

areas:
– ending hunger by helping businesses from
farm to fork;
– stopping climate breakdown by using
renewable energy and energy efficiency to
reduce industrial greenhouse gas emissions;
and
– supporting sustainable supply chains so that
developing country producers get a fair deal
and scarce resources are preserved.