Onkvisit S., Shaw J. International Marketing: Analysis and Strategy
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While immigration laws often restrict labor
movement across countries, business laws tend to
welcome capital movement to employ labor in a
foreign country. When wages in South Korea esca-
lated, Goldstar Co. minimized the labor problem by
importing goods from its overseas facilities back
into South Korea. It may be said that, in the pro-
duction of tradable goods, unskilled labor markets
in the developed countries have been effectively
joined with international markets. As in the case of
apparel assembly and footwear which do not lend
themselves as yet to technology-intensive methods,
a large share of output has already been transferred
to poor countries. Even in Thailand where labor was
once plentiful and cheap but where labor cost has
moved up, some Thai apparel firms are transferring
parts of their production operations to Cambodia
and Vietnam. Likewise, Taiwanese shoe companies
are establishing new operations on the mainland.
Because workers cannot easily emigrate to
another country which has better wages and bene-
fits, wages have not been equalized across countries.
Conceivably, computer workstations and communi-
cations technology could lessen this problem by
allowing a portion of the workforce to work for any
company in any part of the world.As mentioned by
36
TRADE THEORIES AND ECONOMIC DEVELOPMENT
Like other businesspeople, criminals and terrorists
need financing. As such, money laundering is their
lifeblood. According to the IMF, poorly supervised
financial institutions channel $590 billion in illicit
cash a year.
Money laundering is a process to transform pro-
ceeds of crime into a usable form and disguise their
illegal origins.The illegal profits may be derived from
drug or arms trafficking, political corruption, prosti-
tution, and so on.To clean or launder them, criminals
move the proceeds through a variety of transactions
and financial vehicles before investing them in finan-
cial and related assets.
A recent case of money laundering was revealed
when three financial institutions reported similar sus-
picious transactions. It turned out that drug traffick-
ers were using go-betweens who would deliver the cash
proceeds of crime to professionals in travel agencies
and import/export businesses.The professionals would
place the funds in their bank accounts and, for a fee,
transfer them on the basis of fake invoices to bank
accounts abroad. An estimated $30 million was laun-
dered in this way. However, the coordinated analysis
of suspicious transaction reports led to prosecutions
in two countries. This case displays many of the
common features of money laundering: cash is intro-
duced into the banking system by people far removed
from the predicate criminal activity; layering is
achieved by splitting the funds among many small,
seemingly innocuous agents (known as “smurfs”);
creating a misleading paper trail; and getting funds
abroad as soon as possible.
Money laundering is global. If one country’s
regulations are tightened, criminals will simply shift
their laundering activities to a more hospitable
environment. The IMF calls for more effective infor-
mation sharing among authorities. Governments are
urged “to create mechanisms to enable collection and
sharing, including cross-border sharing of relevant
financial information with appropriate supervisory
and law enforcement activities.”
The USA, in response to terrorist acts, has passed
the 2001 USA PATRIOT Act. The US Treasury
Department has required banks, credit card com-
panies, and financial institutions to adopt compre-
hensive programs to combat money laundering.These
firms may have to verify the identity of customers.
Car dealers and travel agencies may be required to do
the same.
Sources:
Eduardo Aninat, Daniel Hardy, and R. Barry
Johnston, “Combating Money Laundering and the Financing
of Terrorism,”
Finance & Development
, September 2002,
44–7; “Manila Pushes to Adopt Money-Laundering Law,”
Asian Wall Street Journal
, June 26, 2001; “Car, Travel
Trades Sought in Fight,”
San José Mercury News
, February
27, 2003; “Money Laundering and Terrorist Financing,”
IMF Survey
, November 26, 2001, 359.
IT’S THE LAW 2.1 MONEY LAUNDERING
Andrew Grove, Intel Corp.’s chief executive officer,
“capital and work – your work and your counter-
part’s work – can go anywhere on earth and do a
job. . . . If the world operates as one big market,
every employee will compete with every person
anywhere in the world who is capable of doing
the same job.”
15
Theoretically, if developments con-
tinue along these lines, a worldwide labor market is
possible.
In the 1970s and 1980s, workers in the Western
world learned a painful lesson: manufacturing
could be moved virtually anywhere. History may
repeat itself, since it is becoming easier for firms to
shift knowledge-based labor as well. This develop-
ment can be attributed to the worldwide shift
to market economies, improved education, and
decades of overseas training by multinationals. As a
result, a global workforce is emerging, and it is
capable of doing the kind of work once reserved
for white-collar workers in the West. Advances in
telecommunications are making these workers
more accessible than ever. In electronics, Taipei,
Edinburgh, Singapore, and Malaysia, although far
away from the end-user and technological break-
throughs, have emerged as global product-develop-
ment centers. Therefore, conventional notions of
comparative advantage are rapidly changing.
Production factors are now considered more
mobile than previously assumed. However, because
of government efforts to restrict the mobility of fac-
tors of production, production costs and product
prices are never completely equalized across coun-
tries. Yet the amount of mobility that does exist
serves to narrow the price/cost differentials. In
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TRADE THEORIES AND ECONOMIC DEVELOPMENT
It is anticipated that some $177 billion in funds will
be transferred globally by 2006. In the case of
Mexico, the central bank reported that the amount
that Mexicans in the USA sent home ($6.3 billion)
exceeded the amounts brought in by tourism ($4.9
billion) and foreign direct investment ($5.2 billion).
In the old days, immigrants used a courier or
family member to send money home. Now banks and
wire transfer companies fill the void – for a hefty fee.
The fees are usually 10 to 15 percent of the amounts
sent home. There is a reason why banks account for
only 9 percent of the money sent home and why wire
transfer companies take 83 percent. Illegal aliens in
the USA do not use banks because they need to show
US documents. Some are afraid that opening bank
accounts may lead to detention or deportation.
Interestingly, the nations with the highest number
of money-transfer recipients often have the lowest
number of people with bank accounts and debit cards.
On the other hand, when workers cash their checks
at check-cashing and cash-transfer companies, they
lose as much as 3 percent of a check’s value.Western
Union and MoneyGram dominate international
money-transfer business due in part to their live agent
relationships.Western Union has 120,000 agent loca-
tions, whereas MoneyGram has 50,000. Western
Union and MoneyGram handle 40 percent of money
transfers to Mexico, and they charge $25 for such a
transaction.
Some banks have become innovative and compet-
itive. Citigroup’s Grupo Financiero Banamex unit has
launched binational accounts for Mexicans working in
the USA, where they can deposit into their accounts
a specific amount that their relatives in Mexico can
withdraw using a Banamex ATM card. These bina-
tional savings, checking, or debit accounts will be
cheaper than wire transfers or other remittance ser-
vices. In the case of Bank of America’s SafeSend, it
allows Mexicans to send $500 home for a $10 fee.
SafeSend recipients receive an ATM card that is used
to withdraw money for free from an ATM in Mexico.
Sources:
“Remittances to Mexico Top Tourism, Other
Investment,”
San José Mercury News
, September 2, 2003;
“Bank Offers Binational Accounts,”
San José Mercury
News
, April 20, 2002; “More Bankers Are Saying ‘Hola,’”
Business Week
, May 13, 2002, 12; “ATMs Make a Play for
Money Transfers,”
Credit Card Management
(November
2002): 45–6; “Repatriating Money Carries High Fees,
Risks,”
San José Mercury News
, November 23, 2002.
MARKETING STRATEGY 2.1 HOW TO MOVE MONEY
theory, as a country exports its abundant factor, that
factor becomes more scarce at home and its price
rises. In contrast, as a country imports a scarce fac-
tor, it increases the abundance of that factor and its
price declines. Therefore, a nation is usually inter-
ested in attracting what it lacks, and this practice
will affect the distribution of production factors.
Since a country’s factors of production can
change owing to factor mobility, it is reasonable
to expect a shift in the kinds of goods a country
imports and exports. Japan, once a capital-poor
country, has grown to become a major lender/sup-
plier of money for international trade. Its trade
pattern seems to reflect this change.
When considering the factors of production,
another item that is very significant involves the
level of quality of the production factors. It is import-
ant to understand that the quality of each factor
should not be assumed to be homogeneous world-
wide. Some countries have relatively better-trained
personnel, better equipment, better-quality land,
and better climate.
Although a country should normally export
products that use its abundant factors as the
product’s major input, a country can substitute one
production factor for another to a certain extent.
Cut-up chicken fryers are a good example. Japan
imports chicken fryers because a scarcity of land
forces it to use valuable land for products of rela-
tively greater economic opportunity. Both the USA
and Thailand sell cut-up chicken fryers to Japan.
The two countries’ production strategies, however,
differ markedly. The USA, due to its high labor
costs, depends more on automation (i.e., capital) to
keep production costs down. Thailand, on the
other hand, has plentiful and inexpensive labor and
thus produces its fryers through a labor-intensive
process. Therefore, the proportion of factor inputs
for a particular product is not necessarily fixed, and
the identical product may be produced with alter-
native methods or factors.
Like Joseph Schumpeter before them, some
economists argue that innovation (knowledge and
its application to real business problems) counts for
38
TRADE THEORIES AND ECONOMIC DEVELOPMENT
Criminals make money in the worst way – even at the
expense of exploiting their fellow human beings.
Women and children are particularly vulnerable. In
some societies, parents sell their children. In Asia and
Eastern Europe, women have been abducted and
forced into prostitution. At the Mexican–American
border, Mexican police still have not solved the
murders of many women who worked in the area or
who tried to go across the border into the USA.
In Taiwan, most of its nearly 300,000 foreign con-
tract laborers are from Thailand and the Philippines.
Licensed job brokers in Taiwan charge each worker as
much as $6000, about the minimum wage for a year’s
work. A worker on a three-year contract needs two
years to pay this fee, leaving only one year for the
actual pay.
In the case of Thailand, it is interesting to note
that laborers pay brokers to try to secure jobs in
Singapore, Taiwan, and wealthy Arab nations. At the
same time, labor costs in Thailand have gone up, and
many employers have now turned to illegal Burmese
aliens instead. While some 200,000 women and chil-
dren from neighboring countries have been smuggled
into Thailand for the sex trade, Thai prostitutes have
been sent by gangsters to other Asian and European
countries.
The US Trafficking Act ranks countries in terms of
their efforts to stamp out human trafficking.Thailand
is a Tier 2 country, meaning that it has not met the
minimum standards in fighting human trafficking. If
it is demoted to Tier 3,Thailand could face economic
measures taken by the USA.
Sources:
“Taiwan’s Invisible Workforce,”
San José Mercury
News
, September 6, 2000; “US Says Thais Doing Too Little
to Stamp Out Human Trafficking,”
Bangkok Pos
t, March
17, 2003.
MARKETING ETHICS 2.1 HUMAN TRAFFICKING: THE WORST KIND
OF FACTOR MOBILITY
more than capital and labor, the traditional factors
of production. Entrepreneurs, industrial research,
and knowledge are what matters.
The discussion so far has dealt with an emphasis
of trade theories on the supply side, but demand is
just as critical, and demand reversal (when it
occurs) may serve to explain why the empirical evi-
dence is mixed.Tastes should not be assumed to be
the same among various countries. A country may
have a scarcity of certain products, and yet its
citizens may have no desire for those products.
Frequently, less developed countries’ products may
not be of sufficient quality to satisfy the tastes of
industrial nations’ consumers. Yugo, for example,
tried in vain to convince American consumers that
its automobiles, despite their very low prices, were
not bad value or of poor quality. Even Renault, in
spite of being from a developed country (France),
could not win over American consumers.
In some market situations, it is possible for
product quality to be too high. Companies in devel-
oped countries, for example, sometimes manufac-
ture products with too many refinements, which
make the products too costly for consumers
elsewhere. German machinery, for instance, has a
worldwide reputation for quality. Nonetheless,
many less developed countries opt for less reliable
machinery products from Taiwan because Taiwan’s
products are less costly. Such circumstances explain
why nations with similar levels of economic devel-
opment tend to trade with one another, since they
have similar tastes and incomes.
Perhaps the most serious shortcoming of classi-
cal trade theories is that they ignore the marketing
aspect of trade. These theories are concerned pri-
marily with commodities rather than with manu-
factured goods or value-added products. It is
assumed that all suppliers have identical products
with similar physical attributes and quality. This
habit of assuming product homogeneity is not likely to
occur among those familiar with marketing.
More often than not, products are endowed
with psychological attributes. Brand-name products
are often promoted as having additional value based
on psychological nuance. Tobacco products of
Marlboro and Winston sell well worldwide because
of the images of those brands. In addition, firms
in two countries can produce virtually identical
products in physical terms, but one product has dif-
ferent symbolic meaning than the other. Less devel-
oped countries are just as capable as the USA or
France in making good cosmetic products, but many
consumers are willing to pay significantly more for
the prestige of using brands such as Estée Lauder
and Dior.Trade analysis, therefore, is not complete
without taking into consideration the reasons for
product differentiation.
A further shortcoming of classical trade theories
is that the trade patterns as described in the
theories are in reality frequently affected by trade
restrictions. The direction of the flow of trade,
according to some critics of free trade, is no longer
determined by a country’s natural comparative
advantage. Rather, a country can create a relative
advantage by relying on outsourcing and other trade
barriers, such as tariffs and quotas. Protectionism
can thus alter the trade patterns as described by
trade theories.
The new trade theory states that trade is based on
increasing returns to scale, historical accidents, and
government policies. Japan’s targeted industry strat-
egy, for example, does not adhere to free-market
principles.Therefore, a moderate degree of protec-
tion may promote domestic output and welfare.
However, as pointed out by Jagdish Bhagwati, it is
not easy to differentiate fair trade based on com-
parative advantage from what may be considered
unfair trade. Are trade practices based on work
habits, on infrastructure, and on differential saving
behavior to be considered unfair? If so, all trade
could possible be considered unfair.
16
ECONOMIC COOPERATION
Given inherent constraints in any system,conditions
for the best policy rarely exist.A policy maker must
then turn to the second-best policy. This practice
applies to international trade as well. Worldwide
free trade is ideal, but cannot be attained. The
theory of second best suggests that the optimum
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TRADE THEORIES AND ECONOMIC DEVELOPMENT
policy is to have economic cooperation on a smaller
scale.
17
In an attempt to reduce trade barriers and
improve trade,many countries within the same geo-
graphic area often join together to establish various
forms of economic cooperation. Major regional
groups are shown in Exhibit 2.1.As shown in Figure
2.6, some countries are members of multiple
groups.
Levels of economic integration
Trade theorists have identified five levels of
economic cooperation. They are: free trade area,
customs union, common market, economic and
monetary union,and political union.Table 2.6 shows
a concise comparison of these cooperation levels.
Free trade area
In a free trade area, the countries involved eliminate
duties among themselves, while maintaining sepa-
rately their own tariffs against outsiders. Free trade
areas include the NAFTA (North American Free
Trade Agreement), the EFTA (European Free Trade
Association), and the now defunct LAFTA (Latin-
American Free Trade Association).The purpose of a
free trade area is to facilitate trade among member
nations.The problem with this kind of arrangement
is the lack of coordination of tariffs against the non-
members, enabling nonmembers to direct their
exported products to enter the free trade area at the
point of lowest external tariffs.
The first free trade agreement signed by the USA
was with Israel in 1985, and the US–Israel Free
Trade Area Agreement eliminates all customs duties
and most nontariff barriers between the two coun-
tries. More recently, the USA has entered into free
40
TRADE THEORIES AND ECONOMIC DEVELOPMENT
Kenya
Uganda
Tanzania EAC
Burundi
Rwanda
Comoros
Madagascar
Botswana
Lesotho
South Africa
Namibia
Swaziland
Malawi
Zambia
Zimbabwe
Mauritius
Seychelles
Mozambique
RIFF
COMESA
SADC
SACU
Angola
Congo, Dem. Rep.
Sudan
Ethiopia
Eritrea
Egypt
Djibouti
Figure 2.6 Regional trading arrangements in
Eastern and Southern Africa
Notes
COMESA: Common Market for Eastern and Southern Africa
EAC: East African Community
RIFF: Regional Integration Facilitation Forum
SADC: Southern African Development Community
SACU: Southern African Customs Union
Source:
Robert Sharer, “An Agenda for Trade, Investment,
and Regional Integration,”
Finance & Development
,
December 2001, 16.
Table 2.6 Levels of regional cooperation
Characteristics of Free trade Customs Common Economic Political
cooperation area union market and union
monetary
union
Elimination of internal duties Yes Yes Yes Yes Probably
Establishment of common barriers No Yes Yes Yes Probably
Removal of restrictions on factors of production No No Yes Yes Probably
Harmonization of national economic policies No No No Yes Probably
Harmonization of national political policies No No No No Yes
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TRADE THEORIES AND ECONOMIC DEVELOPMENT
African Financial Community: CAEMC and
WAEMU members.
AFTA (ASEAN Free Trade Area): ASEAN
members.
Andean Group (the Cartagena Agreement):
Bolivia, Colombia, Ecuador, Peru, and Venezuela.
ANZCERTA (Australia–New Zealand Closer
Economic Relations Trade Agreement): Australia
and New Zealand.
APEC (Asia Pacific Economic Cooperation):
Australia, Brunei, Canada, Chile, China, Hong Kong,
Indonesia, Japan, Korea, Malaysia, Mexico, New
Zealand, Papua New Guinea, the Philippines,
Singapore, Chinese Taipei (Taiwan),Thailand, and the
USA.
Arab/Middle East Arab Common Market:Iraq,
Jordan, Sudan, Syria, United Arab Republic, and
Yemen.
ASEAN (Association of Southeast Asian
Nations): Brunei, Indonesia, Malaysia, the
Philippines, Singapore, Thailand, and Vietnam.
Benelux Customs Union: Belgium, the
Netherlands, and Luxembourg.
CAEMC (Central African Economic and
Monetary Community): Cameroon, the Central
African Republic, Chad, the Republic of Congo,
Equatorial Guinea, and Gabon.
CARICOM (Caribbean Common Market):
Antigua and Barbuda, Bahamas, Barbados, Belize,
Dominica, Grenada, Guyana, Jamaica, Montserrat,
Saint Christopher-Nevis, Saint Lucia, Saint Vincent
and the Grenadines, and Trinidad and Tobago.
Central American Community: Costa Rica, El
Salvador, Guatemala, Honduras, Nicaragua, and
Panama.
CFA Franc Zone: the Comoros, members of the
WAEMU and the CAEMC.
CIS (Commonwealth of Independent States):
Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan,
Kirgizstan, Moldova, Russia,Tajikistan,Turkmenistan,
Ukraine, and Uzbekistan.
East Africa Customs Union: Ethiopia, Kenya,
Zimbabwe, Sudan, Tanzania, and Uganda.
ECOWAS (Economic Community of West African
States): Benin, Cape Verde, Dahomey, Gambia,
Ghana, Guinea, Guinea-Bissau, Ivory Coast, Liberia,
Mali, Mauritania, Niger, Nigeria, Senegal, Sierra
Leone, Togo, and Upper Volta.
EEA (European Economic Area): Iceland,
Norway, and EU members.
EFTA (European Free Trade Association):
Austria, Finland, Iceland, Liechtenstein, Norway,
Sweden, and Switzerland.
EU (European Union): Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, the Netherlands, Portugal, Spain,
Sweden, and the UK (plus ten new members).
GCC (Cooperation Council of the Arab States of
the Gulf): Bahrain, Kuwait, Oman, Qatar, Saudi
Arabia, and the United Arab Emirates.
Group of Three: Colombia, Mexico, and
Venezuela.
LAIA (Latin American Integration Association):
Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador,
Mexico, Paraguay, Peru, Uruguay, and Venezuela.
Mahgreb Economic Community: Algeria, Libya,
Tunisia, and Morocco.
Mercosur (Southern Common Market):
Argentina, Brazil, Paraguay, and Uruguay.
NAFTA (North American Free Trade Agreement):
Canada, Mexico, and the USA.
OECD (Organization for Economic Cooperation
and Development): Australia, Canada, Iceland,
Japan, New Zealand, Norway, Switzerland,Turkey, the
USA, and EU members.
RCD (Regional Cooperation for Development):
Iran, Pakistan, and Turkey.
SICA: El Salvador, Guatemala, Honduras, and
Nicaragua.
WAEMU: (West African Economic and
Monetary Union): Benin, Burkina Faso, Ivory Coast,
Guinea-Bissau, Mali, Niger, Senegal, and Togo.
EXHIBIT 2.1 REGIONAL GROUPINGS AND THEIR NATIONS
trade agreements with Singapore and Chile, while
Mexico has done the same with the EU. Singapore
has also concluded free trade deals with Australia
and Japan. It should be apparent that countries
forming a free trade area do not need to share joint
boundaries.
Customs union
A customs union is an extension of the free trade
area in the sense that member countries must also
agree on a common schedule of identical tariff rates.
In effect, the objective of the customs union is
to harmonize trade regulations and to establish
common barriers against outsiders. Uniform tariffs
and a common commercial policy against non-
members are necessary to prevent them from taking
advantage of the situation by shipping goods initially
to a member country that has the lowest joint
boundaries.The world’s oldest customs union is the
Benelux Customs Union.A more recent example is
the one formed between Turkey and the European
Union; this took effect in 1996.
Common market
A common market is a higher and more complex
level of economic integration than either a free
trade area or a customs union.In a common market,
countries remove all customs and other restrictions
on the movement of the factors of production (such
as services, raw materials, labor, and capital) among
the members of the common market. As a result,
business laws and labor laws are standardized to
ensure undistorted competition. For an outsider,
the point of entry is no longer dictated by member
countries’ tariff rates since those rates are uniform
across countries within the common market. The
point of entry is now determined by the members’
nontariff barriers.The outsider’s strategy should be
to enter a member country that has the least non-
tariff restrictions, because goods can be shipped
freely once inside the common market.
In 1993, the EU and the EFTA formed the
world’s largest and most lucrative common market
– the European Economic Area. The European
Economic Area eliminates nontariff barriers
between the EFTA and EU countries to create a free
flow of goods, services, capital, and people in a
market of more than 400 million people.
Economic and monetary union
Cooperation among countries increases even more
with an economic and monetary union (EMU).
Some authorities prefer to distinguish a monetary
union from an economic union. In essence, mone-
tary union means one money (i.e., a single
currency). The Delors Committee, chaired by
Jacques Delors, who is President of the European
Commission, has issued a report entitled Economic
and Monetary Union in the European Community
that defines monetary union as having three basic
characteristics: total and irreversible convertibility
of currencies; complete freedom of capital move-
ments in fully integrated financial markets; and
irrevocably fixed exchange rates with no fluctua-
tion margins between member currencies, leading
ultimately to a single currency. The economic
advantages of a single currency include the elimi-
nation of currency risk and lower transaction
costs. One European Commission study found that
European businesses were spending $12.8 billion
(0.4 percent of the EU’s GDP) a year on currency
conversions.
The European Commission’s One Market, One
Money report defines an economic union as a single
market for goods, services, capital, and labor, com-
plemented by common policies and coordination in
several economic and structural areas.
18
An eco-
nomic union provides a number of benefits. In terms
of efficiency and economic growth, the transaction
costs associated with converting one currency
into another are eliminated, and the elimination of
foreign exchange risk should improve trade and
capital mobility. In addition, stronger competition
policies should promote efficiency gains. In terms of
inflation, the implementation of an economic union
is a demonstration of a credible commitment to
stable prices.
42
TRADE THEORIES AND ECONOMIC DEVELOPMENT
According to the Delors Committee, the basic
elements of an economic union include the follow-
ing: a single market within which persons, goods,
services, and capital could move freely; a joint com-
petition policy to strengthen market mechanisms;
common competition, structural, and regional poli-
cies; and sufficient coordination of macroeconomic
policies, including binding rules on budgetary
policies regarding the size and financing of national
budget deficits.
A good example of an economic and monetary
union is the unification of East Germany and
West Germany. The terms of the monetary union
called for an average currency conversion rate of
M 1.8 to DM 1 and a conversion of East German
wages at parity into deutschmarks.The 1 July 1990
German Economic and Monetary Union has
resulted in one Germany. In addition to sharing
a common, freely convertible currency (the
deutschmark), the legal environment, commercial
code, and taxation requirements in the German
Democratic Republic (East Germany) are now the
same as those of the Federal Republic of Germany
(West Germany).
Following a transition period, several European
currencies were replaced by a new currency called
the euro (see Cultural Dimension 2.1). At the
beginning of 2002, twelve EU countries (not count-
ing Denmark, Sweden, and the United Kingdom)
introduced euro coins and notes. In 2003, follow-
ing in the footsteps of Denmark three years earlier,
the Swedes voted overwhelmingly to reject mem-
bership in the European single currency.
The EU member states have ceded substantial
sovereignty to the EU.As an example,Denmark was
required by the EU to comply with common pack-
aging rules and remove its twenty-year-old ban on
beers and soft drinks in metal cans.
19
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TRADE THEORIES AND ECONOMIC DEVELOPMENT
On January 1, 1999, the European Union adopted the
euro as its common currency. As the participating
nations adopted the euro, there was a transition cost
in terms of the temporary loss of output and the pos-
sible increase in unemployment due to the required
adjustment to the price stability and fiscal criteria laid
out in the Maastricht Treaty. Banks in particular had
to bear the cost of $10 billion to $13 billion (about
2 percent of annual operating costs over a changeover
period), with software alterations accounting for half
of the cost. By 2002, the substitution of euro notes
and coins was complete.
Euro
is the official name of the European Union’s
currency. Before the name was finally chosen, some
European leaders did the last-minute lobbying for
their favored names. French President Jacques Chirac
wanted to call the currency the Ecu since the name
has historical significance for France. Britain’s Prime
Minister John Major, on the other hand, preferred
names such as the crown, florin, or shilling – all of
which have roots in England.
In the end, the European leaders decided against
using the name
euro
as a prefix (e.g., euro-mark,euro-
pound). Euro was probably chosen because the name
was the least offensive.
Robert Kalina was given a task of designing a set of
eurobank notes. According to the rules, the designs
could not be related to a specific country. So he used
bridges and windows to span seven historical periods:
Classical, Renaissance, Baroque, Rococo, the age of
iron and glass,and modern twentieth-century architec-
ture.One can see through or walk through windows and
doors; opening them symbolizes the future. Bridges
offer a connecting element: communication.These ele-
ments were designed to appeal to 300 million people in
twelve countries. However, euro coins have national
designs on one side and a universal design on the other.
Sources:
“Euro Is Official Name of European Currency,”
San José Mercury News
, December 16, 1995; “Now the
Hard Part: Imposing a Common Currency,”
Wall Street
Journal
, July 28, 1995; “Note Design Aims for Broad
Appeal,”
Bangkok Post
, December 27, 2001.
CULTURAL DIMENSION 2.1 THE EURO
The EU is unique in the sense that it is the first
time that advanced economies have agreed to coop-
erate economically at such a grand scale. Naturally,
with the fall of the Berlin wall in 1989, countries
emerging from communism coveted EU member-
ships, while the EU leaders were stalling them. But
the Yugoslav wars made the EU aware of the need
to enlarge Europe’s security zone. After all, if sta-
bility were not exported from the West, instability
might be imported instead from the East.
20
So the
EU is expanding. Ten new members have been
admitted for accession in 2004. The ten new
members are: Cyprus, the Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Malta, Poland, Slovakia,
and Slovenia. Turkey, Bulgaria, and Romania have
candidate status.While Bulgaria and Romania are on
course for accession in 2007, Turkey was told to
wait at least two more years before starting talks
on joining.
21
Political union
A political union is the ultimate type of regional
cooperation because it involves the integration of
both economic and political policies. With France
and Germany leading the way, the EU has been
moving toward social, political, and economic inte-
gration. The EU’s goal is to form a political union
similar to the fifty states of the USA. The EU’s
debate over political union involves issues such as
having common defense and foreign policies,
strengthening the role of the EU Parliament, and
adopting an EU-wide social policy. In late 1991, the
member countries of the EU have given the EU
authority to act in defense, in foreign, and in social
policies.
It is doubtful that pure forms of economic inte-
gration and political union can ever become reality.
Even if they did, they would not last long because
different countries eventually have different goals
and inflation rates. More important is that no
country would be willing to surrender its sover-
eignty for economic reasons.The EU, despite great
strides, has been plagued by infighting among
member states with conflicting national interests.
Although the Treaty of Rome calls for a free
internal market and permits market forces to
equalize national economic differences, Germany,
France, and the Netherlands – which have expen-
sive social welfare programs – argue that the social
dimension must be taken into account in order to
prevent social dumping. In other words, they seek to
prevent a movement of business and jobs away from
areas with high wages and strong labor organizations
to areas with low wages, less organized labor forces,
and weak social welfare policies.As a result, the EC
Commission adopted the Social Charter in 1989 to
establish workers’ basic rights and to equalize EU
social regulations (e.g., a minimum wage, labor par-
ticipation in management decisions, and paid holi-
days for education purposes). Member countries
accused of social dumping must subject their prod-
ucts to sanctions. European socialists believe that
the Social Charter is necessary to prevent countries
with the lowest social benefits from gaining a com-
parative advantage.
Countries with lower labor costs (e.g., Portugal,
Spain, and Greece), however, view the Social
Charter as something that forces capital-poor coun-
tries to adopt the expensive social welfare policies,
in effect increasing the cost of labor and unemploy-
ment.To them, the Social Charter is nothing more
than protectionism in the guise of harmonization.
Such expensive policies are also a major concern
to European industry. As may be expected, several
initiatives are the subject of heated debate.
The European Union is a good case study of how
to form economic and political cooperation at a high
level. The EU will be the first group of industrial
nations to deal with: (1) how to redefine national
sovereignty in light of new economic alliances; (2)
how to combine various national priorities with a
single decision-making process; and (3) how to
deregulate separate economies to induce competi-
tion among national monopolies.
22
Economic and marketing implications
Marketers must pay attention to the effects of
regional economic integration or cooperation
44
TRADE THEORIES AND ECONOMIC DEVELOPMENT
because the competitive environment may change
drastically over time. As in the case of the EU,
although EU member countries still maintain their
national identities, national borders are no longer
trade barriers. Marketers must treat the EU as a
single market rather than as numerous separate and
fragmented markets. They need to rethink their
marketing, finance, distribution, and production
strategies.Foreign businesses need to make an effort
to become familiar with new regulations so as to
take full advantage in the changing market. For
example, even though standard harmonization may
exclude some US firms from the EU markets, the
USA should work to influence the process in order
to turn the potential barrier into an advantage.
Whereas countries that are not members of
the EU view the EU’s ambitious goals with some
concern, outsider firms can still cope successfully
with the Single Internal Market program. Instead of
viewing the EU’s developments as obstacles, mar-
keters should regard them as both challenges and
opportunities. Not unlike coping with a single
country’s protectionist measures (except on a larger
scale), the key to competing effectively in the EU is
for an external firm to become an insider. Figure
2.7 shows how the United Kingdom can serve as a
strategic location for this purpose.
General Electric Co. has formed joint ventures
in major appliances and electrical equipment with
Britain’s largest electronics firm, has acquired
France’s largest medical equipment maker, and has
planned to build a plastics factory in Spain. Coca-
Cola has terminated some licensing agreements and
has consolidated its European bottling operations to
cut costs and prices. Using acquisitions to build up
its European position, Sara Lee Corp. purchased a
Dutch coffee and tea company and took control of
Paris-based Dim, Europe’s largest maker of panty-
hose. In addition, Sara Lee has experimented with
the “Euro-branding” strategy by printing several
languages on a single package and distributing it to
several countries.
Initially, new trade policies generally tend to
favor local business firms. For example, IBM
encountered problems in Europe, where the EU
members wanted to protect their own computer
industry. Alternatively, outsider firms may be able
to take advantage of the situation to overcome
the barriers erected by a particular member of a
regional economic cooperation. Facing France’s
troublesome entry procedure, Japan could first ship
its products into Germany before moving them
more freely into France.
Because of the favorable economic environment
in a cooperative region, additional firms desire
entry and the competitive atmosphere intensifies.
Firms inside the region are likely to be more com-
petitive owing to the expansion of local markets,
resulting in better economies of scale. External
firms (those outside the area) are faced with over-
coming trade barriers, perhaps through the estab-
lishment of local production facilities. For example,
Ireland tried to attract foreign investment by men-
tioning in its advertisements that it is a member of
the EU. Nike, a US firm, was able to avoid the EU
tariffs by opening a plant in Ireland.
Over time, a region will grow faster than before
owing to the stimulation caused by trade creation
effects, favorable policies, and more competition,
but economic cooperation can create problems as
well as opportunities within international markets.
The expanded market offers more profit potential,
but it may create an impression of collusion when
subsidiaries or licensees are granted exclusive rights
in certain member countries.The long-term result
may be an area-wide antitrust among new firms or
nonmember countries wishing to trade within the
economically integrated region.
Economic cooperation may either improve or
impede international trade, depending on how the
result of the cooperation is viewed. Economic inte-
gration encourages trade liberalization internally,
while it promotes trade protection externally. The
tendency is for a member of an economic group to
shift from the most efficient supplier in the world
to the lowest-cost supplier within that particular
economic region. As in the case of NAFTA, the
results have been generally positive. Promoting
trade between the USA and Mexico has been highly
successful. While the US Labor Department has
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TRADE THEORIES AND ECONOMIC DEVELOPMENT