Page 93 - Introduction to Business

CHAPTER 2 The Environment of Business 67

eral trade negotiations. Every five years or so, a new round of trade negotiations is
started among GATT members with the objective of further lowering tariff barriers
and increasing global trade—accelerating the globalization process. Since the cre-
ation of GATT in 1947, world trade has increased by an average of some 6 percent
per year (see Exhibit 2.2 for growth in trade since 1997). The last round of trade
negotiations began in 2001 in Doha (Qatar) and is called the Doha round of trade
talks. A key goal of the Doha round is to reduce farm subsidies on agricultural pro-
duction, especially in the European Union and the United States. When agricultural
subsidies are reduced, the production of surplus (which is dumped in the interna-
tional market) agricultural products, especially in Europe and the United States,
will decrease. This, in turn, will raise the world price (to the theoretical equilibrium
price) of agricultural products, and this will encourage developing countries to
increase domestic production and attain greater food self-sufficiency. The GATT
was renamed the World Trade Organization (WTO) on January 1, 1995 and it cur-
rently has 148 members. The WTO was established to include trade in agriculture
and services, and investment liberalization. The vast majority of WTO members are
developing countries, which still maintain relatively high tariff rates. On the other
hand, the industrialized countries, although few in number, account for almost
two-thirds of the world’s merchandise trade (see Exhibit 2.3) and have brought
down tariff barriers gradually over the past 55 years. With each new round of trade
negotiations, both the developed and the developing countries have lowered their
trade and investment barriers. Each reduction has led to the further globalization
of business. While globalization is here to stay, the process could always be slowed
if some or all countries either refrain from further tariff or investment liberalization
or resort to preferential bilateral (between two countries) or regional (a group of
countries within a region of the world) trade agreements at the expense of multi-
lateral trade agreements under the auspices of the WTO.

reality How have you been personally affected by globalization?
CH ECK

Regional Trading Blocs

LEARNING OBJECTIVE 7
Summarize the stages of regional integration and explain its pros and cons.

The WTO is an international organization within which multiple national groups,
corporations, and governments cooperate on matters—such as increasing interna-
tional trade and investment—of mutual interest. This can lead to a greater volume
of trade and investment across countries, faster economic growth, job creation, tax
receipts, increased competition, and increased consumer welfare. Despite the fact
that global trade and investment liberalization lead to global benefits, some coun-
tries prefer to work more closely within a regional setting. We need to ask ourselves:
What are the motives for regional integration? Why do certain countries want to
work more closely with one another while others do not? Are all regional trading
blocs based on identical principles?

Stages of Regional Integration. Countries may have economic, social, or
political reasons for regional integration. For the most part, countries generally
begin working together with some form of economic integration, for example, to
promote trade and investment among themselves. Economic integration occurs
when two or more countries join together to form a larger economic bloc. The main
objectives here are economic gain, that is, to increase economic growth and effi-
ciency (through economies of scale) by working together rather than separately, to
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