CHAPTER 3

REGIONAL MARKET CHARACTERSTICS AND PREFERENTIAL TRADE

AGREEMENTS

SUMMARY

This chapter examines the environment for world trade, focusing on the institutions and
regional cooperation agreements that affect trade patterns.

The multilateral World Trade Organization, created in 1995 as the successor to the
General Agreement on Tariffs and Trade, provides a forum for settling disputes among
member nations and tries to set policy for world trade.

The world trade environment is also characterized by preferential trade agreements

among smaller numbers of countries on a regional and sub-regional basis. These
agreements can be conceptualized on a continuum of increasing economic integration.

Free trade areas such as the one created by the North American Free Trade
Agreement (NAFTA) represent the lowest level of economic integration.

The purpose of a free trade agreement is to eliminate tariffs and quotas. Rules of origin
are used to verify the country from which goods are shipped. A customs union (e.g.
Mercosur) represents a further degree of integration in the form of common external
tariffs.

In a common market such as Central American Integration System (SICA), restrictions

on the movement of labor and capital are eased in an effort to further increase integration.

An economic union, such as the European Union (EU), the highest level of economic
integration is achieved by unification of economic policies and institutions.
Harmonization, the coming together of varying standards and regulations, is a key
characteristic of the EU.

Other important cooperation arrangements include the Association of Southeast Asian

Nations (ASEAN), the Cooperation Council for the Arab States of the Gulf (GCC). In
Africa, the two main cooperation agreements are the Economic Community of West
African States (ECOWAS) and the South African Development Community (SADC).

OVERVIEW

The year 2007 marketed the sixtieth anniversary of the General Agreement on Tariffs
and Trade (GATT), a treaty among nations whose governments agree, at least in
principle, to promote trade among members.

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ANNOTATED LECTURE/OUTLINE

THE WORLD TRADE ORGANZIATION AND GATT

What is GATT?

The General Agreement on Tariffs and Trade (GATT) was treaty among nations whose
governments agreed to promoted trade among members.

GATT was intended to be a multilateral, global initiative which liberalized world trade
and handled 300 disputes over fifty years; however, GATT lacked enforcement power.

The successor to GATT, the World Trade Organization (WTO), born in 1995, provides a
forum for trade-related negotiations among its 150 members and mediates trade disputes.

The Dispute Settlement Body (DSB) mediates complaints concerning unfair trade
barriers; during a 60-day consultation period, parties engage in good-faith negotiations
(see Table 3 -1).

Failing that, the DSB convenes a panel and acts on the panels recommendations; if after
due process, the losing party violates WTO rules, the WTO can impose trade sanctions.

WTO trade ministers meet annually to work on improving world trade, but politicians in
many countries resist the WTOs plans to move swiftly in removing trade barriers.

The current round of WTO negotiations began in 2001; the talks collapsed in 2005, and
attempts to revive them in 2006 were not successful.

PREFERENTIAL TRADE AGREEMENTS

The GATT treaty promotes free trade on a global basis; in addition, countries in each of
the world's regions are seeking to liberalize trade within their regions.

What is a preferential trade agreement?

A preferential trade agreement is a mechanism that confers special treatment on select

trading partners. By favoring certain countries, such agreements frequently discriminate
against others.

Free Trade Area

How is a free trade area formed?

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A free trade area (FTA) is formed when two or more countries agree to eliminate tariffs
and other barriers that restrict trade.

A free trade area comes into being when trading partners successfully negotiate a free
trade agreement (also abbreviated FTA), the ultimate goal of which is zero duties on
goods that cross borders between the partners.

Rules of origin are used to discourage the importation of goods into the member country
with the lowest external tariff for transshipment to one or more FTA members with higher
external tariffs.

To date, dozens of free trade agreements, many of them bilateral, have been successfully
negotiated.

Customs Unions

A customs union represents the logical evolution of a free trade area.

In addition to eliminating internal barriers to trade, members of a customs union agree to

the establishment of common external tariffs (CETs).

Some of the customs unions discussed in this chapter are the Andean Community, the
Central American Integration System (SICA), Mercosur, and CARICOM.

Common Market

A common market is the next level of economic integration.

In addition to the removal of internal barriers to trade and the establishment of common
external tariffs, the common market allows for free movement of factors of production,
including labor and capital.

Economic Union

An economic union builds upon the elimination of the internal tariff barriers, the
establishment of common external barriers, and the free flow of factors. It seeks to
coordinate and harmonize economic and social policy within the union to facilitate the
free flow of capital, labor, goods, and services from country to country.

The full evolution of an economic union would involve what?

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The full evolution of an economic union would involve the creation of a unified central
bank, the use of a single currency, and common policies on agriculture, social services
and welfare, regional development, transport, taxation, competition, and mergers.

A true economic union requires extensive political unity, which makes it similar to a
nation. The further integration of nations that were members of fully developed economic
unions would be the formation of a central government that would bring together
independent political states into a single political framework.

The European Union is approaching its target of completing most of the steps required to
become a full economic union.

NORTH AMERICA

North America, which includes Canada, the United States, and Mexico, comprises a
distinctive regional market.

The U.S. has more industry leaders than any other nation, dominating the computer,
software, aerospace, entertainment, medical equipment, and jet engine industry sectors.

In what year did CFTA formally come into existence?

The U.S.-Canada Free Trade Area (CFTA) came into existence in 1989, resulting in over
$400 billion per year trade between the two countries.

Who are the top three trading partners of the U.S.?

Canada is the number one trading partner of the U.S.; Mexico is second, and China ranks
third.

American companies have more invested in Canada than in any other country.

The North American Free Trade Agreement (NAFTA) became effective in 1994; the
result is a free trade area with a combined population of 430 million and a total GNP of
roughly $14 trillion (see Table 3-4 and Figure 3-2).

Why does NAFTA create a free trade area as opposed to a customs union or a
common market?

The governments of all three nations pledge to promote economic growth through tariff
elimination and expanded trade and investment. At present, however, there are no
common external tariffs nor have restrictions on labor and other factor movements been
eliminated.

Illegal immigration from Mexico remains a contentious issue.

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NAFTA allows for discretionary protectionism (e.g., California avocado growers won
protection, allowing Mexican avocados into the U.S. during the winter only in the
northeast at a quota).

LATIN AMERICA: SICA, Andean Community, Mercosur, CARICOM

Latin America includes the Caribbean and Central and South America; the market is
sizeable, has a huge resource base, and Latin America has begun economic
transformation.

Balanced budgets are a priority, and privatization is underway. Free markets, open
economies, and deregulation are replacing past policies; tariffs are now reduced to 10 to
20 percent.

Global corporations see import liberalization, prospects for lower tariffs within sub-
regional trading groups, and the potential for more efficient production. Many envision a
free trade area throughout the hemisphere.

What are the most important trading arrangements in Latin America?

Important trading arrangements include:

Central American Integration System (SICA)
Andean Community
The Common Market of the South (Mercosur)
The Caribbean Community and Common Market (CARICOM).

Central American Integration System

Central America is trying to revive its common market, which originally had five
members:

What countries originally comprised the Central American Integration

System?

El Salvador
Honduras
Guatemala
Nicaragua
Costa Rica

In 1997, with Panama as a member, the group changed its name to the Central American
Integration System (SICA). (Table 3-5 shows the income and population data in the
region).

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Common rules of origin allow for freer movement of goods among SICA countries
which agreed to a common external tariff of 5 to 20 percent for most goods by the mid-
1990s.

Still, attempts to achieve integration are uncoordinated, inefficient, and costly (e.g., there
are still tariffs on imports of products sugar, coffee, and alcoholic beverages.)

Andean Community

The Andean Community was formed in 1969 to accelerate development of member states
through economic and social integration. (Figure 3-4 and Table 3-6).

What countries make up the Andean Community?

The member countries of the Andean Community are:

Bolivia
Colombia
Ecuador
Peru
Venezuela

Members lowered tariffs on intra-group trade and decided what products each country
should produce. Foreign goods and companies were kept out as much as possible.

A sub-regional free trade zone was formed, abolishing foreign exchange, financial and
fiscal incentives, and export subsidies by 1992. Common external tariffs were
established.

While Peru has one of the fastest-growing economies in the region, Ecuador has
experienced years of economic and political instability.

How have rural residents and the urban poor viewed the progress of the
Andean Community?

Overall, rural residents and the urban poor in the region have become frustrated and
impatient with the lack of progress.

Common Market of the South (Mercosur)

March 2006 marked the fifteen anniversary of the signing of the Asuncin Treaty.

What countries were the original members of Mercosur?

The treaty signified the agreement by the governments of (see Table 3-7 and Figure 3 -4):

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 Argentina,
Brazil,
Paraguay, and
Uruguay.

Internal tariffs were eliminated, and common external tariffs of up to 20 percent were
established; in theory goods, services, and factors of production will move freely.

Until this goal is achieved, Mercosur will operate as a customs union.

Trade among member nations peaked at $20 billion in 1998.

A major impediment to further integration is the lack of economic and political discipline
and responsibility a situation reflected in the volatile currencies of Mercosur countries.

Argentina provides a case study in how a country can emerge from an economic crisis as
a stronger global competitor. In 2002, Argentina devalued its currency by 29 percent for
exports and capital transactions. (Table 3 7).

Why was Chile not allowed to become a full member of Mercosur?

In 1996, Chile became an associate member of Mercosur; policymakers blocked full

membership because Chile had lower external tariffs that the rest of Mercosur.

Chile had been negotiating for inclusion in NAFTA; however, after Mexicos deficit with
the U.S. became a trade surplus, U.S. interest in expanding NAFTA cooled.

Chiles export-driven success makes it a role model for the rest of Latin America as well
as Central and Eastern Europe. Bolivia, Colombia, Ecuador, and Peru are associate
members of Mercosur, because they recently agreed to merge with the Andean
Community.

The EU is Mercosurs number-one trading partner.

What country is the newest member of Mercosur?

Venezuela became a full Mercosur member in 2006. Flush with revenues from oil
exports, Venezuela is expected to have a positive impact on regional integration.

Caribbean Community and Common Market (CARICOM)

Who are the member countries of CARICOM?

CARICOM was formed in 1973 with the following member states:

Antigua and Barbuda

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 Bahamas
Barbados
Belize
Dominica
Grenada
Guyana
Haiti
Jamaica
Montserrat
St. Kitts and Nevis
St. Lucia
St. Vincent and the Grenadines
Trinidad and Tobago

The population of the entire 15-member CARICOM is about 15 million; disparate levels
of economic development can be seen by comparing GNP per capita in Antigua and
Haiti.(Table 3-8).

What does CARICOM have as its main objective?

To date, CARICOM's main objective has been to achieve a deepening of economic

integration by means of a Caribbean common market. However, CARICOM was largely
stagnant during its first two decades of existence.

In 1998, leaders agreed to establish an economic union with a common currency. A recent
study of the issue has suggested, however, that the limited extent of intra-regional trade
would limit the potential gains from lower transaction costs.

English-speaking CARICOM members defend their privileged position with the U.S.
(e.g., Guatemala).

As of 2000, the Caribbean Basin Trade Partnership Act exempts textile and apparel
exports from the Caribbean to the U.S. from duties and tariffs. (Figure 3-5).

Current Trade-Related Issues

One of the biggest issues pertaining to trade is the Free Trade Area of the Americas.
Many Latin American countriesBrazil in particularare frustrated by Americas
broken promises.
As a result, Brazil and Mercosur advocate slower three-stage negotiations to include:
discussions on customs forms and deregulation;
dispute settlement and
rules of origin; and tariffs.

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ASIA-PACIFIC: The Association of Southeast Asian Nations (ASEAN)
The Association of Southeast Asian Nations (ASEAN) was established in 1967 as an
organization for economic, political, social, and cultural cooperation among its member
countries.

Who were the original members of ASEAN?

The original six members of ASEAN were:

Brunei
Indonesia
Malaysia
the Philippines
Singapore
Thailand

What was the first Communist nation to join ASEAN?

Vietnam became the first Communist nation in the group when it was admitted to
ASEAN in July 1995. (Figure 3-6 and Table 3 -9).

Cambodia and Laos were admitted at the organization's thirtieth anniversary meeting in
July 1997.

Burma (known as Myanmar by the ruling military junta) joined in 1998.

Who are ASEANs top three trading partners?

Individually and collectively, ASEAN countries are active in regional and global trade.
ASEAN's top trading partners include the United States ($52.8 billion in 2002 exports),
the European Union ($48 billion in exports), and China ($23 billion).

In 1994, economic ministers from the member nations agreed to implement an ASEAN
Free Trade Area (AFTA) by 2003, 5 years earlier than previously discussed.

What is ASEAN plus three?

What countries were added to result in ASEAN plus six?

Recently, Japan, China, and Korea were informally added to the member roster; some
observers called this configuration ASEAN plus three. When the roster expanded again
to include Australia, New Zealand, and India, it was dubbed ASEAN plus six.

In fewer than three decades, Singapore has transformed itself from a British colony to a
vibrant, 240-square-mile industrial power.

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Singapore has an extremely efficient infrastructure the Port of Singapore is the world's
second-largest container port (Hong Kong's ranks first) and a standard of living second
in the region only to Japans.

Singapore accounts for more than one-third of U.S. trading activities with ASEAN
countries.

Marketing Issues in the Asia-Pacific Rim

Mastering the Japanese market takes flexibility, ambition, and a long-term commitment.
Japan has changed from being a closed market to one thats just tough, with barriers in
attitudes and laws. Japan requires top-quality products and services, tailored to local
tastes.

Countless visits and socializing with distributors are necessary to build trust, and
marketers must master the keiretsu system of tightly knit corporate alliances.

WESTERN, CENTRAL, AND EASTERN EUROPE

The countries of Western Europe are among the most prosperous in the world. Entering
the first decade of the twenty-first century, the governments of Western Europe have
achieved unprecedented levels of economic integration.

The European Union (EU) (Table 3-10).

The EU began in 1958 with the Treaty of Rome and original members Belgium, France,
Holland, Italy, Luxembourg, and West Germany.

In 1973, Great Britain, Denmark, and Ireland were admitted, followed by Greece in 1981
and Spain and Portugal in 1986.

The objective is to harmonize national laws and regulations so that goods, services,
people, and eventually money can flow freely across national boundaries.

The EU encourages a community-wide labor pool and establishes rules of competition

patterned after U.S. antitrust law. Improvements to highway and rail networks are
underway.

Finland, Sweden, and Austria joined in 1995

Cyprus, the Czech Republic, Estonia, Hungary, Poland, Latvia, Lithuania, Malta, the
Slovak Republic, and Slovenia became full EU members on May 1, 2004. Bulgaria and
Romania joined in 2007.

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Today, the 27 nations of the EU represent 490 million people and a combined GNI of
$15.0 trillion.

The 1991 Maastricht Treaty prepared the transition to an economic and monetary union
(EMU) with a European central bank and a new currency, the euro.

The euro brings the benefits of eliminating currency conversion costs and exchange rate
uncertainty.

In 2002, euro coins and paper money were issued to replace national currencies such as
the French franc.

Marketing Issues in the European Union

The business environment in Europe has undergone considerable transformation since

1992, with significant implications for all elements of the marketing mix. (Table 3 -11).

Marketing mix issues must be addressed in Europe's single market (e.g., content and
other product standards that varied among nations must be harmonized). Harmonization
means that content and other product standards that varied among nations have been
brought into alignment. (Table 3-11).

Direct comparability of prices in the euro zone forces companies to review pricing
policies; the marketing challenge is to develop strategies to take advantage of a large,
wealthy market.

The enlargement of the EU will further impact marketing strategies and harmonized laws;
food safety laws in the EU are different form those in Central European countries.

Because they are in transition, the markets of Central and Eastern Europe present
interesting opportunities and challenges.

Global companies view the region as an important new source of growth, and the first
country to penetrate a country market often emerges as an industry leader.

What has been the favored mode of entry?

Exporting has been a favorite entry mode, but direct investment is on the rise; low wage
rates, below Spain and Greece, make this region attractive for low-cost manufacturing.

For consumer products, distribution is a critical marketing mix element because

availability is key to sales; studies show that consumers and businesses are embracing
global brands.

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A study found a high degree of standardization of marketing program elements; the core
product and brand elements were largely unchanged from those used in Western Europe.

THE MIDDLE EAST

What countries comprise the Middle East?

The Middle East includes 16 countries:

Afghanistan
Cyprus
Bahrain
Egypt
Iran
Iraq
Israel
Jordan
Kuwait
Lebanon
Oman
Qatar
Saudi Arabia
Syria
The United Arab Emirates
Yemen

The majority is Arab, a large percentage Persian, and a small percentage Jews. The
population is 95 percent Muslim and 5 percent Christian and Jewish.

Despite apparent homogeneity, Middle Eastern countries fall into all categories of the
index of economic freedom from mostly free (Bahrain, Kuwait, Saudi Arabia, United
Arab Emirates) to repressed (Iran and, until the 2003 regime change, Iraq).

The Middle East lacks a single societal type with a typical belief, behavior, and tradition;
each major city has many social groups, different in religion, social class, education, and
wealth.

The price of oil drives business. Bahrain, Iraq, Iran, Kuwait, Oman, Qatar, and Saudi
Arabia hold significant world oil reserves which have widened the gap between rich and
poor nations.

Disparities contribute to political and social instability. Saudi Arabia is the main market
in the region, with 25 percent of the worlds known oil reserves.

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During the Persian Gulf War against Iraq, Gulf Arabs broke unwritten rules including
accepting help from the U.S., an ally of Israel.

Anti-Americanism flared in 2003 during the invasion of Iraq to remove Saddam Hussein
from power. Having returned sovereignty to Iraq in June 2004, Americans remain in Iraq.

Cooperation Council for the Arab States of the Gulf

The Gulf Cooperation Council (GCC) was established in 1981. The six gulf countries
hold about 45 percent of the worlds known oil reserves, but production is only about 18
percent of world oil output. (Table 3 -12 and Figure 3 -8).

Saudi Arabia and other Middle Eastern countries post account deficits because they
import most goods and services and depend on oil revenues to pay for imports.

The organization provides coordination, integration and cooperation in all economic,

social, and cultural affairs.

Committees coordinate trade development, industrial strategy, agricultural policy, and

uniform petroleum policies and prices.

Goals include establishing an Arab Common Market and increasing trade ties with Asia.
In 1989, two other organizations were formed.
Morocco, Algeria, Mauritania, Tunisia, and Libya formed the Arab Maghreb
Union (AMU).
Egypt, Iraq, Jordan, and North Yemen created the Arab Cooperation Council
(ACC).
Many Arabs see their regional groups as economic communities to foster the
development of inter-Arab trade and investment.

Marketing Issues in the Middle East

Connection is a key word in conducting business in the Middle East; developing

relationships with key business and government figures are likely to cut through red tape.

Bargaining is culturally ingrained, and business people should be prepared for haggling;
establishing personal trust, mutual trust, and respect are essential.

Decisions are not made by correspondence or telephone. The Arab businessperson does
business with the individual, not the company.

Women are not part of the business or entertainment scene for traditional Muslim Arabs.

AFRICA

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It is not really possible to treat Africa as a single economic unit.

What are the three unique regions of Africa?

The 54 nations on the continent can be divided into three distinct areas:

the Republic of South Africa,

North Africa, and
sub-Saharan or Black Africa

With 1.3 percent of the world's wealth and 11.5 percent of its population, Africa is a
developing region with an average per capita income of less than $600.

The Arabs living in North Africa are differentiated politically and economically.

The six northern nations are richer and more developed, and severalnotably Libya,
Algeria, and Egypt benefit from large oil resources.

For what does the acronym Mena stand?

The Middle East and North Africa are viewed as a regional entity Mena; the economies
of non-oil, emerging Mena (Jordan, Lebanon, Morocco, Tunisia) have performed best.

Economic Community of West African States (ECOWAS) (see Table 3 13).

ECOWAS was established in 1975 to promote trade, cooperation, and self-reliance in

West Africa:
Benin
Burkina Faso
Cape Verde,
The Gambia,
Ghana
Guinea
Guinea-Bissau
Ivory Coast
Liberia
Mali
Mauritania
Niger
Nigeria
Senegal
Sierra Leone
Togo

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In 1980, members established a free trade area for unprocessed agricultural products and
handicrafts. By 1990, tariffs on twenty-five items had been eliminated, with measures
taken to create a single monetary zone by 1994.

Still, economic development has occurred unevenly in the region.

East African Cooperation

In 1996, Kenya, Uganda, and Tanzania established a mechanism to promote free trade
and economic integration. Tariff issues and a customs union are being explored.

Development of regional tourism and energy projects are underway.

South African Development Community (SADC)

SADC promotes trade, cooperation, and economic integration; members include:

Angola
Botswana
Democratic Republic of Congo
Lesotho
Malawi
Mauritius
Mozambique
Namibia
South Africa
Seychelles
Swaziland
Tanzania
Zambia,
Zimbabwe

The goal is a fully developed customs union. South Africa joined the community in 1994,
and represents 75 percent of regional income and 86 percent of intraregional exports

South Africa has explored the formation of a free trade area with the EU.

South Africa, Botswana, Lesotho, Namibia, and Swaziland belong to the Southern
African Customs Union (SACU).

Marketing Issues in Africa

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In 2000, President George W. Bush signed the African Growth and Opportunities Act
(AGOA) into law. Created with the theme of Trade Not Aid, the law is designed to
support African nations that make significant progress toward economic liberalization.

AGOA also represents a formal step toward a U.S. Africa free trade zone.

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DISCUSSION QUESTIONS

1. Explain the role of the World Trade Organization. Why has the Doha Round of trade
talks stalled?

The World Trade Organization (WTO) is the successor to GATT. Based in

Geneva, the WTO has a dispute-settlement body (DSB) representing all member
countries that mediates trade complaints concerning unfair trade barriers and other
issues. During a 60-day consultation period, parties to a complaint are expected to
engage in good-faith negotiations and reach amicable resolution of a given issue.
Failing that, the complainant can ask the DSB to appoint a three-member panel to
hear the case. After convening, the panel has nine months within which to issue its
ruling.

The DSB is empowered to act on the panels recommendations. The losing party
to a dispute can turn to the seven-member appellate body. If a countrys trade
policies are found to violate WTO rules, it is expected to change those policies
and negotiate compensation via lower tariffs with the winning country. If
appropriate changes and compensation are not forthcoming, the WTO can
authorize trade sanctions against the loser.

2. Describe the similarities and differences between a free trade area, a customs union, a
common market, and an economic union. Give an example of each.

All four forms of economic integration eliminate tariffs and quotas among
member nations. At the next level, customs unions, common markets, and
economic unions all have common external tariff and quota systems. Common
markets and economic unions provide for reducing or eliminating restrictions on
people, money, and other factors. An economic union is the most highly evolved
form of integration, calling for harmonization of economic policies and
institutions. Examples include: free trade area NAFTA; customs union EU;
common market Central American Common Market (CACM); economic union
EU.

3. The creation of the Single Market in Europe has led to harmonization. What does this
mean? How does harmonization affect a companys global marketing strategies?

Harmonization, is the coming together of varying standards and regulations across

countries. Harmonization means that content and other product standards that
varied among nations have been brought into alignment. As a result, companies
may have an opportunity to reap economies of scale by cutting back on the
number of product adaptation. In addition, harmonization can shift marketing
strategies from brand to benefit segmentation, standardize packaging and labeling
requirements.

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4. What are the criteria for joining the euro zone?

The objective of the EU is to harmonize national laws and regulations so that

goods, services, people, and eventually money can flow freely across national
borders. Members in the euro zone Austria, Belgium, Finland, Ireland, the
Netherlands, France, Germany, Italy, Luxembourg, Portugal, and Spain all use a
single currency called the Euro.

5. Identify a regional economic organization or agreement in each of the following areas:

Latin America, Asia/Pacific, Western Europe, Central Europe, The Middle East, and
Africa.

Three important trade agreements in Latin America are the Central American
Integration System (SICA), Andean Group, and Southern Cone Common Market
(Mercosur). The Asia/Pacific region is home to the Association of Southeast Asian
Nations (ASEAN). The European Union (EU) and European Economic Area
(EEA) are the important trading blocs in Western Europe. Further east, the new
Central Cooperation Council (GCC) dates back to 1981; newer agreements
include the Arab Cooperation Council (ACC) and Arab Maghreb Union Economic
Community of West African States (ECOWAS); elsewhere on the continent, the
ten-nation South African Development Coordination Conference (SADCC) has
existed since 1980.

6. Several key dates mentioned in the chapter are listed here. Can you identify the event
associated with each?

Answers follow this question in the text.

CASES

Case 3-1: The United States and South Korea Sign a Free Trade Agreement: The
Assignment

Overview: Trade deals require all parties to make concessions, and the negotiations
between the United States and South Korea are a case in point. In the spring of 2008,
President Lee Myung-bak, of South Korea decided to lift a ban on U.S. beef; in return,
the United States agreed to exclude South Koreas rice industry from the trade agreement.

1. When a trade deal is passed, there are winners and losers. Who stands to win if the
U.S. Korea ratified? Who stands to lose?

The winners would seem to be the Korean rice farmers, American farmers and
beef producers. Included in the win column would be American car consumers
and Korean electronics exporters. Members of the lose column would be
consumers of beef in Korea and of rice in America as prices for both commodities
would eventually rise.

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2. Answers will depend on students political affiliation.

Case 3 -2: Ecuadors Galapagos Islands and Ecotourism

Overview: Ecuador boats a dazzling mix of geographic wonders, including the

Galapagos Islands. Today, tourists are a constant presence on the islands. Ecotourism has
been behind Ecuadors economic growth during the past decade.

1. The case reports economic data showing the GDP in the Province of Galapagos
increased 78 percent over the six-year period from 1999 to 2005. However, during the
same period, per capita GDP showed an increase of less than 2 percent.
What is the explanation for this? What are the implications for sustainable development
of the Galapagos tourism industry?

Tourism played an important role in the growth of the economy accounting for
about two-thirds percent of that growth. Obviously, the economic advantages of
ecotourism is not being realized by the entire Galapagos population growing
only 2 percent while the actual number of the human population doubled to
30,000 in the past decade.

Sustainable development and growing tourism for the Galapagos Islands are
mutually exclusive goals. With an increase in people comes damaging
footprints food, water, and sanitation that may require extensive ecological
changes to the islands to accommodate. These numbers, only a slight gain in
GDP by native Ecuadorians for example, shows that a massive increase in tourism
would only damage the ecological environment and not substantially improve the
lives of the Ecuadorians.

2. The Galapagos Islands are home to many different endemic species. Do you think
that Ecuadors policymakers have done enough to ensure sustainable growth of the
tourism sector? Are the limits on human inhabitants and visitors stringent enough?
Too stringent?

Student answers will differ depending on their positions and values.

3. How do you market something such as the Galapagos Islands, which have such strict
guidelines?

Marketing involves delivering a product or service that meets the needs and wants
of your target market with a value proposition that is superior to your competitors.
In the case of the Galapagos Islands, the product is the unspoiled nature and
habitat of these islands. Human interaction, in the form of tourism, can virtually
destroy the very product theyve come to experience.

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Ecuadorians should not worry about controlling the demand side but rather the
supply side by limiting exposure and using price as a limitation factor for
Ecotourism.

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TEACHING TOOLS AND EXERCISES

Additional Cases: Inclusion: The More the Merrier Why Its Important in Marketing
and Politics John A. Quelch, Katherine A. Jocz, HBS 7857BC, Press Chapter

Nations: No Quick Fix Applying Marketing Concepts to How They Compete, Hohn
A. Quelch, Katherine A. Jocz, HBS 7861BC.

Activity: Students should be preparing or presenting their Cultural-Economic Analysis

and Marketing Plan for their country and product as outlined in Chapter 1.

Out-Of-Class Reading: Mejias, Roberto J. and Jose G. Vargohernandez. Emerging

Mexican and Canadian Strategic Trade Alliances under NAFTA. Journal of Global
Marketing 14, no. 4 (2001), pp. 89-116.

Guest Speakers: Invite a student from a country on the euro (for example, Spain) and
another one from a country not on the euro (such as Brazil). Initiate a class discussion
with the two on the pros and cons of having a common currency.

SUGGESTED READING

Books
Abengunrin, Olayiwola. Economic Dependence and Regional Cooperation in Southern
Africa: SADCC and South Africa in Confrontation. Lewiston, N.Y.: The Edwin Mellen
Press, 1990.

Anderson, Kym, and Richard Blackhurst, eds. Regional Integration and the Global
Trading System. New York: Harvester/Wheatsheaf, 1993.

Axline, W. Andrew. The Political Economy of Regional Cooperation. London: Pinter,

1994.

Fallows, James M. Looking at the Sun: The Rise of the New East Asian Economic and
Political System. New York: Vintage Books, 1995.

Letterman, Gregory G. Basics of Multilateral Institutions and Multinational

Organizations: Economics and Commerce. Ardsley, NY: Transnational, 2002.

Odell, John, ed. Negotiating Trade: Developing Countries in the WTO and NAFTA.
Cambridge, England: Cambridge University Press, 2006.

Ohmae, Kenichi. The End of the Nation State: The Rise of Regional Economies. New
York: Free Press, 1995.

Roett, Riordan, ed. Mercosur: Regional Integration, World Markets. Boulder, Colorado:
Lynne Rienner Publishers, 1999.

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Articles
Aho, C. Michael. 'Fortress Europe: Will the EU Isolate Itself from North America and
Asia? The Columbia Journal of World Business 29, no. 3 (Fall 1994), pp. 32-39.

Bakos, Gabor. After COMECON: A Free Trade Area in Central Europe? Europe-Asia
Studies 45, no. 6 (1993), pp. 1025-1044.

Banks, Philip. India: The New Asian Tiger? Business Horizons 38, no. 3 (May 1995),
pp. 47-50.

Czinkota, Michael R. The World Trade Organization Perspectives and Prospects.

Journal of International Marketing 3, no. 1 (1995), pp. 85-91.

Bernal, Richard L. From NAFTA to Hemispheric Free Trade. The Columbia Journal of
World Business 29, no. 3 (Fall 1994), pp. 22-31.

Healey, Nigel M. The Transition Economies of Central and Eastern Europe: A Political,
Economic, Social and Technological Analysis. The Columbia Journal of World Business
29, no. 1 (Spring 1994), pp. 62-70.

Krum, James R. and Pradeep A. Rau. Organizational Responses of U.S. Multinationals

to EC-1992: An Empirical Study. Journal of International Marketing 1, no. 2 (1993), pp.
49-70.

McQueen, Matthew. Lom Versus Free Trade Agreements: The Dilemma Facing ACP
Countries. World Economy 21, no. 4 (June 1998), pp. 421-444.

Mejias, Roberto J. and Jose G. Vargohernandez. Emerging Mexican and Canadian

Strategic Trade Alliances under NAFTA. Journal of Global Marketing 14, no. 4 (2001),
pp. 89-116.

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