Regional Free Trading Groups Blocking Up



The growth of regional trade arrangements has excited keen controversy in recent years. More than 100 have been formed, 29 since 1992, and almost all the roughly 130 members of. the World Trade Organization belong to one or more of them. Figure 1 shows the main regional trade groups.

More recently, the EU, 11 southern Mediterranean governments and the Palestine National Authority launched the 'Euro-Mediterranean partnership' zone, which creates a new trading bloc. Goods made in countries such as Morocco and Turkey will gain free access to the single European market.

By 2010 it is envisaged that the Mediterranean basin will be open for reciprocal free trade in most manufactured goods and services ~ creating a trading bloc to rival the North American Free Trade Agreement ;md the Asia-Pacific Economic Co-operation forum.

In Asia, the fashion for regionalism is in the ascendant. One example is die recent push for a free-trade area embracing the seven-member Association of South East Asian Nations. Another is the Asia Pacific Economic Go-operation forum, two thirds of whose 18 members arc Asian,

By lowering barriers between national markets, such groupings can make life easier for exporters - provided they operate inside the club. If they are outsiders, however, they risk facing continued discrimination and - where regional trade arrangements overlap - confusion.

Enthusiasts say regional groupings promote free trade by acting as building blocks, which can eventually unite. But sceptics fear the more likely result will be to fragment the global economy into mutually exclusive, possible warring, blocs

Regionalism is undoubtedly posing another type of challenge to the world trade system, in the

form of proliferating rules and regulations. For instance, 22 of the 24 regional agreements being . analyzed by the WTO contain their own anti-dumping provisions, 18 have provisions relating to subsidies, 19 deal with competition policy and 12 have their own disputes settlement procedures. Some experts fear this trend could undermine the WTO's rules-based system by encouraging the spread of regional regulations that conflict with it. It is hard to be sure just how serious a risk this is, because of the weakness of procedures for vetting whether regional groups are compatible with WTO rules.

These problems are finally starting to be addressed. A formal WTO committee is examining regional trade arrangements. However, developing firm and workable disciplines, which command support from all WTO members, will take many years. Much work is still needed to clarify countries' often differing interpretations of the GATT/WTO rules on regional trade agreements and to define more precisely areas of incompatibility. Furthermore, the new committee seeks to set up effective procedures for reaching decisions and for reviewing regularly the operation of existing regional arrangements. Where these are found inconsistent with WTO rules, some mechanism will be needed to ensure they fail back in line.

CK.S: Paul Magjausson, ""Free trade": They can hardly wait', Business Week (14 September 1992), pp. 24-5; Andrew Hilton, 'Mythology, markets, and the emerging Europe', Harvard Business Revieiv [November-December 1992), pp. 50-4; Larry Armstrong, 'NAFTA isn't out, but it sure is down', Business Week (22 March 1993), pp. 30-1; Guy do Jonquieres, 'Ruilding blocks or warring blocs?', Financial Times, FT Exporter, 11 ( Spring 1996), p. 3; Jon Marks. 'New kids on the Eurotrading bloc'. Financial Times, FT Exporter, 11 (Spring 19%), p. 7.

ings. The foreign company's property may be taken, its currency holdings may be blocked, or import quotas or new duties may be set. International marketers may find it profitable to do business in an unstable country, but the unsteady situation will affect how they handle business and financial matters.


European Free Trade Association

European Union

Belgium. France, Italy, Luxembourg. Germany. Netherlands, UK, Denmark. Greece,


Venezuela, Colombia. Ecuador, Porn, Bolivia


Asian Free Trade Area Brunei, Indonesia, Malaysia, Philippines, Singapore,Thailand.


North American Free.

Trade Agreement US, Canada, Mexico

Norway. Switzerland, Ireland, Spain, Portugal. Vietnam (limited member) (Chile next to join) Iceland. Liechtenstein Austria, Finland, Sweden

Brazil Trade Agreements With


Brazil,Argentina, Paraguay, Uruguay


South African Development Committee Angola, Botswana, Lesotho, Malawi, Mozambique. South Africa, Swaziland, Tanzania. Zimbabwe


West African Economic & Monetary Union

Ivory Coast, Niger,Togo, Burkina Faso, Senegal, Benin, Mali


South Asian Association for Regional Co-op eraiian

India, Pakistan, Sri Lanka, Bangladesh, Maldives, Bhutan. Nepal


Asia-Pacific Economic Co-operation Australia, Brunei, Malaysia, Singapore.Thailand, New Zealand, Papua New Guinea, Indonesia, Philippines,Taiwan, Hong Kong.Japan. South Korea, China, Canada. US, Mexico, Chile


Brazil,Argentina, Paraguay, Uruguay


MONETARY REGULATIONS Sellers want to take their profits in a currency of value to them. Ideally, the buyer can pay in the seller's currency or in other world currencies. Short of this, sellers might accept a blocked currency - one whose removal from die country is restricted by the buyer's government - if they

198 • Chapter 5 The Global Marketplace uounterlrade International trade involving Che direct or inilirect exchange of goods/or other goods instead of cash. Forms include barter compensation (buyback) and counterpurchase.


The set of basic values, purt_-eptiim.s, wants and behaviours learned by a member of society from family and other important institu tions.

can buy other goods in that country that they need themselves or can sell elsewhere for a needed currency. Besides currency limits, a changing exchange rate, as mentioned earlier, creates high risks for the seller.

Most international trade involves cash transactions. Many Third World and former Eastern bloc nations do not have access to hard currency or credit terms to pay for their purchases from other countries. So western companies, rather than lose the opportunity of a good deal, will accept payment in kind, which has led to a growing practice called countertrade. Countertrade is nothing new and was the way of doing business before money was invented. Today it accounts for about 25 per cent of all world trade.

Countertrade takes several forms. Barter involves the direct exchange of goods or services. For example, British coal mining equipment has been 'sold' for Indonesian plywood; Volkswagen cars were swapped for Bulgarian dried apricots; and Boeing 747s, fitted with Rolls-Royce engines, were exchanged for Saudi oil. Another form is compensation (or buyback), whereby the seller sells a plant, equipment or technology to another country and agrees to take payment in the resulting products. Thus, Goodyear provided China with materials and training for a printing plant in exchange for finished labels. Another form is counter-purchase. Here the seller receives full payment in cash, but agrees to spend some portion of the money in the other country within a stated time period. For example, Pepsi sells it syrup to Russia for roubles, and agrees to buy Russian vodka for reselling in the United States.

Countertrade deals can be very complex. For example, Daimler-Benz recently agreed to sell 30 trucks to Romania in exchange for 150 Romanian jeeps, which it then sold to Ecuador for bananas, which were in turn sold to a German supermarket chain for German currency. Through this roundabout process, DaimlerBenz finally obtained payment in German money.11

For some firms the bartering system has worked. However, companies must be aware of the complexities and/or the limits: Rank Xerox, trying to sell high technology to Russia, not surprisingly drew the line at accepting payment in racing camels and goat horns!

GOVERNMENT BUREAUCRACY. A fourth factor is the extent to which the host government runs an efficient system for helping foreign companies: efficient customs handling, good market information and other factors that aid in doing business. A common shock to western husinesspeople is how quickly barriers to trade disappear if a suitable payment (bribe) is made to some official (see Marketing Highlight 5.3).

• Cultural Environment and Building Cultural Empathy

Each country has its own traditions, norms and taboos. The seller must examine the way consumers in different countries think about and use certain products before planning a marketing programme. The cultural barriers in target country markets must be identified. Culture is defined simply as the learned distinctive way of life of a society. The dimensions of culture include: the social organization of society (e.g. the class system in the United Kingdom, the caste system in India, the heavy reliance on social welfare in Sweden or the lack of it in Japan); religion (ranging from the Islamic fundamentalism of Iran to the secular approaches of western countries sxieh as the United Kingdom); customs and rituals; values and attitudes towards domestic and international life; education provision and literacy levels; political system; aesthetic systems (e.g. folklore, music, arts, literature); and language.

Culture permeates the lifestyles of customer targets and is manifested through the behavioural patterns of these customers. Culture and people's general

Muviour influence the customer's actions in the marketplace, which, in turn, impact upon the firm's marketing decisions. There are often surprises. For mniple, the average Frenchman uses almost twice as many cosmetics and aids as does his wife. The Germans and the French cat more packaged,

To Bribe or Not?

In Germany, the tax office gives tacit approval to backhanders: bribes are tax-deductible. The exact extent of the corruption is not known, but experts reckon that in the German public sector contracts alone, the volume is at least DM20 billion a year. Such corruption is rarely exposed to the public, of course, but in Germany it is by all accounts a widespread and profitable affair. It starts out at local council level and goes on up the chain.

There have been a few sensational cases in the past 20 years. The Flick affair revealed in the 1980s the substantial payments an industrialist made to Germany's main political parties. In another case, Eduard Swick, a Bavarian businessman, was alleged to have paid leading members of the Bavarian government, including the late president Franz Josef Strauss, in return for help in his but tie with tax collectors. Outside government circles, the most spectacular corruption case has been the Herzklappen affair, whereby doctors were alleged to have colluded with manufacturers in overcharging health insurers for heart valves.

In Germany, a company can offset any bribes it makes as a necessary business expense. All the finance authorities ask for is the name of the recipient of the bribe. The information is not used specifically to track down the corrupt official -who, by taking the bribe, is actually breaking the law - but simply to ensure that he or she declares the money received on his or her tax return.

Unlike domestic corruption, the bribery of people in a foreign country is not an offence in Germany. Moreover, German companies are not alone in adopting this practice. Only in the t'niied States, which passed the Foreign Gorrupt Practices Act in 1977, are such payments illegal. Not surprisingly, the US Department of Trade complains of unfair competition when confronted with these modes of working by European companies, especially in developing countries.

Naturally, there are German parliamentary members who want to see changes. Ingomar Hanchler, a Social Democratic member of parliament, argued that corruption damages free competition and subverts the market economy while also encouraging monopolies, which can pay most. But there are those who disagree, saying that bribery is a necessary vehicle for business. Outlawing it would damage German firms in the international market and threaten jobs. The federation of German industry, the BD1, also challenges the view that bribes should be considered corrupt, maintaining that unusual payments are not bribes at all, but an essential expense and marketing cost.

What would a keen British businessperson hoping to invest in a deprived east German town do to get fast entry into this market? Well, one such British businessman hoping to invest in the town of Potsdam, near Berlin, did the unthinkable (by German standards!):

The British businessman was confronted with an unusual offer from a local politician. Pay DM25,000 consultancy fee to a law company, the politician told him, and your case will be dealt with quickly and to your satisfaction. Needless to say, the British executive knew the official bad connections with the law firm in question and what the money was for and where it was going. lie chose not to pay the 'consultancy fee', in refusing, he was probably an exception. He also did not get to invest in the town of Potsdam.

SOURCE: Frederick Stiidemann, 'A land where bribes are tax-dediitiiible'. The Eurupean (17-23 June 1994), p. 3.


Highlight 5.3

branded spaghetti than do Italians. Italian children like to eat chocolate bars between slices of bread as a snack. Women in Tanzania will not give their children eggs for fear of making them bald or impotent. A good example of cultural differences is the case of a Scandinavian company wishing to sell baby clothes in Belgium. It discovered its clothes were virtually unsaleable because, in most regions, clothes for baby girls are trimmed with blue and those for baby boys with pink.

Business norms and behaviour also vary from country to country. The unwary business executive needs to be briefed on these factors before conducting business in another country. Mistakes due to laek of understanding of foreign business behaviour affect business relations greatly. Here are some examples of different global business behaviour:

• In face-to-face communications, Japanese business executives rarely say 'no' to the western business executive. Thus westerners tend to be frustrated and may not know where they stand. Where westerners come to the point quickly, Japanese business executives may find this behaviour offensive.

• In France, wholesalers don't want to promote a product. They ask their retailers what they want and deliver it. If a foreign company builds its strategy around the French wholesaler's co-operation in promotions, it is likely to fail.

• When British executives exchange business cards, each usually gives the other's card a cursor;' glance and stuffs it in a poeket for later reference. In Japan, however, executives dutifully study each other's cards during a greeting, carefully noting company affiliation and rank. They hand their card to the most important person first.

• In the United Kingdom and the United States, business meals are common. In Germany, these are strictly social. Foreigners are rarely invited to dinner and such an invitation suggests a very advanced association. The opposite applies in Italy where entertaining is an essential part of business life (guests should offer to pay but, in the end, should defer to their Italian host). In France, watch out. There are two kinds of business lunch - one for building up relations, without expecting anything in return, and the other to discuss a deal in the making or to celebrate a deal afterwards. Deals, however, should be concluded in the office, never over a lunch table.

• Shaking hands on meeting and on parting is common in Germany, Belgium. France and Italy. Ignoring this custom, especially in France, causes offence. In France, it is advisable to shake hands with everyone in a crowded room.

The key to success for the international marketer lies in assiduously researching and coming to terms with a country's culture. The firm must build cultured empathy and overcome the cultural differences with a view to establishing long- J term market position. Cultural empathy is achieved in a number of ways:

• Acquire in-company knowledge and experience. This is a slow and arduous approach, but it does provide a lasting means for understanding foreign culture.

• Continuous market research. The firm should undertake market research for general background information as well as commission more specific research for individual projects.

• Visit foreign country and customers. This is invaluable for developing firsthand knowledge of customers and markets. Such activities also build goodwill, clearly show the firm's commitment to the markets served and yield valuable feedback to the company's home base.

Hire local personnel. Local personnel may be employed to speed up information gathering. This bus been the approach used by many Japanese multinational firms in overseas markets. Sound local market knowledge helps to develop marketing strategies that are better geared to local requirements and conditions.

i'st distributors/agents. Firms may gain inside information from local distributors or agents who are familiar with the marketplace. Baskin Robhin's, an American ice-cream maker, relied on its sales agent, a subsidiary of the military-run China Satellite Launch and Tracking Control Group, for its knowledge of how to work the Chinese bureaucracy in order to bring its US-made ice cream through customs.1" Joint-ventures and strategic alliances. Firms accelerate the process of building cultural sensitivity through a joint venture or alliance with a host country company. The Japanese market, as mentioned earlier, is noted for its complex distribution system. To succeed foreign firms are advised to form strategic partnerships with loeal Japanese firms and to get to grips with the 'chosen people' problem.0 The typical Japanese businessman, like many of his western counterparts, regards his own culture as the world's most nearly perfect. Thus, when foreigners are on Japanese turf, they would do well to learn, respect and observe as many local customs as possible.

Build language skills. Language is an essential part of a country's culture. It is important to distinguish between the cultural and technical aspects of language. The technical characteristics are easily learnt and readily available in translation dictionaries and language courses. The cultural empathy derives from a deep understanding of the language and its use in both the verbal anci non-verbal forms.11 A lack of cultural understanding of language leads to errors in translation which ean be, at best, embarrassing to both parties and, at worst, offensive to the host client/customer (see Marketing Highlight 5.4).

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  • layton
    How do regional groupings promote trade?
    6 years ago

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