Page 99 - Business Principles and Management

Unit 1

Although international
trade and investment have
existed for centuries, they did
not become major topics of
study and interest until fairly
recently. What are some rea-
sons for this?
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Several factors help firms engage in international business. One key factor is
treaties on trade and investment signed by different countries. The World Trade
Organization (WTO) is an international organization that creates and enforces
the rules governing trade among countries. Trade agreements negotiated under
the authority of the WTO have led to huge cuts in tariffs. These cuts have boosted
exports and imports among the almost 150 member countries.
Development of trading blocs has also stimulated global trade and invest-
ment. A trading bloc is a group of two or more countries who agree to remove all
restrictions between them on the sales of goods and services, while imposing barri-
ers on trade with and investment from countries that are not part of the bloc.
There are many forms of trading blocs. The best example of an advanced
form of trading bloc is the European Union (EU). The EU currently has 25
members, as shown in Figure 4-2. Since it was formed in 1957 as the European
Economic Community, the EU has gone beyond free trade among its members.
It is trying to create a “United States of Europe,” where there will also be free
movement of capital and labor and where common economic and monetary
policies will be followed. On January 1, 1999, 11 EU members took a major
step toward integrating their economies by merging their national currencies
into a single new currency called the euro. With a single currency, international
firms can look at these European countries as a single market and do not have
to worry about exchange rate changes.
In 1989, the United States signed a free-trade agreement with Canada. In 1992,
Canada and the United States signed a similar agreement with Mexico, called the
North American Free Trade Agreement (NAFTA), which created the world’s
largest trading bloc by removing tariffs and other barriers to trade among the three
nations. Many American firms have relocated to Mexico to take advantage of the
lower costs of production in that country. Unlike the EU, under NAFTA there is no
move yet to allow unrestricted movement of people among the three countries or
to integrate the three economies with common monetary or economic policies.
International business is also facilitated by two major international institu-
tions—the International Monetary Fund (IMF) and the World Bank. The IMF’s
main purpose is to help countries that are facing serious financial difficulties in
paying for their imports or repaying loans. The World Bank provides low-cost,

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