International buiness - Research Paper Example

 International Business Table of Contents Introduction 2 The role played by World Trade Organization (WTO) 3 The North American Free Trade Agreement (NAFTA) 4 Business Environment in European Union 5 Europe Union and its Economic Condition 6 Opportunities for establishing business in EU 6 Risks related to EU 7 Comparison Between Polices Followed by EU and NAFTA 9 References 10 Introduction The entire world is undergoing a major change in the way its people operate and conduct business driven primarily by the process known as “globalization”. Globalization is brought about as a result of faster and more reliable communication techniques between nations and corporations as the principles and potential wealth of capitalism spreads around the globe. This process has introduced a revolution in all aspects of business; political boundaries are no longer a hindrance for business practices whether ethical and moral or not. Because business is no longer confined within the local marketplace, each entity entering the market finds themselves competing with companies halfway around the world and under different governmental restrictions. Each organization naturally attempts to maximize their bottom line for their shareholders by operating under the most lenient restrictions, lowest costs for production and highest areas for distribution. However, nations still retain the right to establish and enforce specific rules and regulations upon corporations operating within their regional market as a means of maintaining discipline and protecting national resources including the citizenry. Generally speaking and depending on the condition of local market, nations can opt to adopt either a free trade policy in its approach to international trade or take a more protectionist stance. Each nation has its own criteria and priorities to consider when determining which strategy to adopt. While the approach in the past has leaned more toward free trade, this approach is changing as developing countries have reassessed their viewpoint regarding protection of the local industry in order to ensure that local companies are not driven out of business by the high competition they face with international companies. The purpose of this report is to discover some of the various approaches that have been taken to both encourage international trade at the same time that it seeks to protect local business. The role played by World Trade Organization (WTO) The World Trade Organization (WTO) is an organization that lobbies internationally for the liberalization of trade. It can acts as the middle man between business and government working to negotiate trade agreements favorable to international business. In many ways, it can be said that this is the organization that sets rules for international trade and actively settles trade disputes. The present state of WTO came about as the result of long term negotiation and final agreement on the General Agreement on Tariffs and Trade (GATT) that existed from 1986-94. This was adjusted in 1994 through the “Doha Development Agenda” giving the WTO its present configuration (WTO-a, n.d.). The primary purpose of the WTO is to promote the free flow of trade between all nations, irrespective of whether they are considered developed or developing. The WTO puts forward the argument that free trade is essential for economic development worldwide as well as for the well-being of all nations. If all nations removed their trade barriers, the WTO argument holds that the entire worldwide trade mechanism would be more transparent and would react according to a more predictable pattern. The WTO has introduced many positive changes into the international trade environment, but many of the developing countries still fear participation will equate their own exploitation. These countries hold a general belief that their adherence to the policies introduced by the WTO regarding free trade will result in greater deterioration of their own national interests and resources. As these policies have proven effective over time, many of these countries have begun removing trade barriers such as quotas, subsidiaries and other forms of taxes introduced with the intention of impeding international trade imports. The WTO has welcomed such positive attitudes within the developing nations and it has introduced training and assistance to these nations to encourage further cooperation. For example, the Institute for Training and Technical Cooperation (ITTC) is providing training programs in many countries that are currently unable to participate actively in international trade activities (WTO-b, n.d.). It has been observed that different countries present different degrees of risk and opportunity for multi-national companies. As a result, much of this risk and opportunity is seriously taken into consideration throughout the diversification process and the company is typically already well-positioned before entering the marketplace thanks to the organization offered through the WTO. For example, establishing operations in the European Union has its own opportunities as well as risks, and these become more visible when it is compared with other agreements such as The North American Free Trade Agreement (NAFTA) and its associated risks and benefits. The North American Free Trade Agreement (NAFTA) NAFTA is an agreement that came into force beginning January 1, 1994. The primary intention of this agreement was to enhance free trade between Mexico, Canada and the US. This agreement resulted in the almost complete removal of trade barriers between these three countries. Canada removed its conservative approach towards protecting internal business and dismantled many of its protectionist regulations. The US also made certain alterations in their international trade strategies. NAFTA proved to have a significant positive impact as Mexican exports reached a new high particularly in the US. Mexican exports in the US were reported at $49.4 billion in 1994, the year NAFTA was put into effect, and soared to $134.9 billion by 2000 under the freedoms offered through the agreement. Other benefits related to NAFTA include agricultural trade from the US to Mexico resulting in the US providing as much as 72 percent of Mexico’s agricultural products. US agricultural trade to Canada is also increasing, from $4.2 billion in 1990 to $11.9 billion in 2000. Many of these agricultural products like vegetable oil, sugar, peanut products and other commodities are on the increase as a result (United States Department of Agriculture, 2008). However, according to SSAC (2005), growth is the NAFTA countries in areas other than textile and appraisals is equivalent to non-NAFTA countries and thus not experiencing greater than normal growth as a result of this agreement. This has caused many to conclude that nothing significant has happened as a direct result of NAFTA and businesses require greater diversification. The US people have also argued that although NAFTA has resulted in high trade, it has also resulted in reduced job opportunities at home. At NAFTA’s US summit held in August of 2007, more than 2000 people gathered within 15 miles of the summit complex area to protest its policies. These people argued that NAFTA is destroying jobs in the poorer areas and hampering environmental protection efforts. The people in Mexico also showed their dissatisfaction regarding liberalization in maize industry as a result of NAFTA policies (BBC NEWS, 2007). Business Environment in European Union With the changing business environment, multi-national corporations are finding it easier and more profitable to establish their operation and conduct business in the European Union (EU). The major hindrance to this idea as related to the EU is that it is not a single country, so different nations within this group still have their own rules and regulations offering new and sometimes major risks. It is often assumed that there is a strong intimacy between the EU and American policies regarding trade and business relations, but the two entities are not identical. As a result, it is wise to understand the unique factors involved in making the EU different from other countries, particularly the United States, before attempting to discover the unique risks and opportunities associated specifically with doing business in the EU nations. Europe Union and its Economic Condition The EU is a collaboration of 27 nations that are attached to each other through their economic and political ties. This union was formed in 1993 after the signing of the Treaty of Maastricht. These states have combined under a single market entity which adheres to similar laws and ideologies of their countries of origin. The EU also maintains common trade policies among these nations. At present, the organization encourages the use of a common currency called the Euro, but this practice has only been adopted by 16 countries currently referred to as the Eurozone. Many of these nations have also abolished the requirement to show a passport in order to cross borders among EU states. Unlike most international organizations, the EU represents the concept of super-nationalism in that it maintains a common law similar to that held by its member states but it exists independently of these different governments. At the same time, these individual state governments retain full liberty to finalize certain factors specific to their own nations. Opportunities for establishing business in EU There are many factors at work that encourage multi-national corporations to establish their business in the EU territory. One significant bonus exists in the cultural integration found throughout all EU nations which creates a favorable, relatively homogenous environment for marketers and distributors. Similarities in legal factors serve to reduce hindrance to business as one common law is applicable throughout the entire entity. The political cooperation found within the EU leads to a favorable environment for multi-national corporations to begin their operations based in any of the nations in EU. These nations have a good economic background with a combined GDP of $18.39 trillion. The other major opportunity that the EU provides to multi-national corporations is that it offers a single large market condition which has been further supported by the adoption of a single currency. Risks related to EU The many benefits associated with doing business under the auspices of the EU are somewhat offset by a number of risks. The convenience of operating upon the basis of the Euro is realized only so long as the organization operates within those nations that comprise the Eurozone. Different currencies are still used within non-Eurozonal nations which can continue to create currency problems. In addition, the necessity of a passport to pass between nations has not been completely eradicated. The necessary tedium of associated paperwork involved in crossing borders and changing currency extends the amount of time and effort necessary for basic transactions and reduces the effectiveness of the organization. The presence of a single trade market also does not suggest that there will be not competition among these nations. In order to maintain discipline and cope with growing competition between nations, a governing body or commission with the charge of keeping an eye on corporate practices such as mergers, acquisitions or takeovers. One example of a case in which this greater oversight was necessary was in the settlement of a nine year legal action against the Microsoft Corporation in which the company was fined €777 million. While perceived as necessary for the protection of the consumer and healthy business, such strong action tends to hinder the positive sentiment of international companies considering the possibility of starting their business within the EU nations (Virtual Advisor, n.d.). Comparison Between Polices Followed by EU and NAFTA Criteria EU NAFTA Time of formation Quite old concept Quite new concept Factor taken in consideration Pay more important for development of political integration and enhancement of economical position. The main aim is to enhance export between NAFTA countries. Numbers of countries involved 27 nations are involved which are either in European region or outside Just 3 nations are involved within the agreement Emphasis Mainly believe in keeping a close eye on different actions of multi-national corporations Mainly rely on free trade between the nations involved. Reaction from people Many multi-national corporations find the stringent policies of EU as some of the biggest risks for carrying out business in these nations Many people firmly believe that the policies suggested by NAFTA has resulted in the exploitation of poor countries and high unemployment. References BBC NEWS, (August 21, 2007), Nafta talks tackle trade issues, Retrieved on September 16, 2009 from http://news.bbc.co.uk/2/hi/business/6955148.stm Department of Economics, (March 10, 2004), NAFTA and its Impact on the United States, IOWA State University, Retrieved on September 16, 2009 from www.econ.iastate.edu/classes/econ496/lence/.../NAFTA.pdf Schuman, R. & Monnet, J. (October 2006), Competition Dimensions of NAFTA and the European Union: Semi-Common Competition Policy, Uncommon Rules, and No Common Institutions, University of Miami, Retrieved on September 16, 2009 from http://www6.miami.edu/eucenter/EULaw_LongPaper_06.pdf United States Department of Agriculture, (January 2008), FACT SHEET: North American Free Trade Agreement (NAFTA), Retrieved on September 16, 2009 from http://www.fas.usda.gov/info/factsheets/NAFTA.asp Virtual Advisor (No Date), Doing Business in Western Europe, Part VI in an occasional series on International Business, Retrieved on 16 September, 2009 from http://www.va-interactive.com/inbusiness/editorial/bizdev/articles/europe.html WTO-a, (No Date), “What is the World Trade Organization?”, The World Trade Organization, Retrieved on September 16 2009 from http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact1_e.htm WTO-b, (N Date), “WTO technical assistance and training”, he World Trade Organization, Retrieved on September 16, 2009 from http://www.wto.org/english/tratop_e/devel_e/teccop_e/tct_e.htm Read More