International Marketing Marketing Department 2015 EC

CHAPTER TWO:
INTERNATIONAL MARKETING ENVIRONMENT
2.1 Framework for analyzing international Marketing environment
2.2 Geographic environment in international Marketing
2.3 Demographic environment in International Marketing
2.4 Economic and Socio-cultural environment
2.5 Political and Legal environment
2.6. Global trading environment
2.1. Framework For Analyzing International Marketing Environment
The marketing environment consists of all factors that can affect the organization’s marketing
activities. These factors are largely uncontrollable. The macro environment refers to all forces that
are part of the larger society and affect the microenvironment. It includes concepts such as
geography, demography, economy, natural forces, technology, politics, and culture. Different
countries have different currencies, accounting practices, legislation, interest rates inflation etc.

Before deciding whether or not to sell abroad, a company must thoroughly understand the
international marketing environment. Basic principles of domestic marketing apply to international
marketing. However, there are some differences, many of which are centered on environmental
factors which affect international marketing.

2.2. Geographic Environment In International Marketing

Geographic environment involves geographic units such as nations, states, regions, counties, and
cities. The company can operate in one or few geographic areas or operate in all but pay attention to
local variations. The globalization of business has made geography indispensable for the study of

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international marketing. Without significant attention to the study of geography, critical ideas and
information about the world in which business occurs will be missing.

In recent decades, however, geography has become more familiar and more relevant to many
people because emphasis has been placed on five fundamental themes as ways to structure
geographic questions and to provide answers for those questions. Those themes are (1) location, (2)
place, (3) interaction, (4) movement, and (5) region.
Geography focuses on answering “Where?” questions. Where are things located? What is their
distribution across the surface of the earth? An old aphorism holds, “If you can map it, it’s
geography.” That statement is true, because we use maps to gather, store, analyze, and present
information that answers “Where?” questions. Identifying where things are located is only the first
phase of geographic inquiry. Once locations have been determined, “Why?” and “How?” questions
can be asked. Why are things located where they are? How do different things relate to one another
at a specific place, How do different places relate to each other, How have geographic patterns and
relationships changed over time. These are the questions that take geography beyond mere
description and make it a powerful approach for analyzing and explaining geographical aspects of a
wide range of different kinds of problems faced by those engaged in international marketing.
2.3. Demographic Environment In International Marketing
Demography refers to studying human populations in terms of size, density, location, age, gender,
race, and occupation. This is a very important factor to study for marketers and helps to divide the
population into market segments and target markets. This can be beneficial to a marketer as they
can decide who their product would benefit most and tailor their marketing plan to attract that
segment. Demography covers many aspects that are important to marketers including family
dynamics, geographic shifts, work force changes, and levels of diversity in any given area.
The world population is growing at an explosive rate. This has major implications for business. A
growing population means growing human needs. Depending on purchasing powers, it may also
mean growing market opportunities. On the other hand, decline in population is a threat so some
industrial and the boon to others. The marketing executives of toy-making industry spend a lot of
energy and efforts and developed fashionable toys, and even advertise “Babies are our business-
our only business”, but quietly dropped this slogan when children population gone down due to
declining birth rate and later shifted their business to life insurance for old people and changed their
advertisement slogan as “the company has not babies the over 50s”.

2.4. Economic and Socio-Cultural Environment

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2.4.1. Economic Environment
Economic Environment: mean that all those macro-economic factors like income distribution, level
of savings, debt and credit available to consumers and stage of economic development in a
particular country of interest. Marketing is an economic activity affected by the economic
environment in which it is conducted. A major characteristic of the international marketer’s world is
the diversity of marketing environments in which business may be done. In particular, the economic
dimensions of the world market environment are of prime importance.
Economic variables relating to the various markets' characteristics are population, income,
consumption patterns, infrastructure, geography, and attitudes toward foreign involvement in
economy form a starting point for assessment of market potential for the international marketer.
Market Characteristics
The main dimensions of a market can be captured by considering variables such as those relating to
the population and its various characteristics, infrastructure, geographical features of the
environment, and foreign involvement in the economy.
Population
The number of people in a particular market provides one of the most basic indicators of market
size and the potential demand. Because market entry decisions may lie in the future, it is
worthwhile to analyze population projections in the areas of interest and focus on their possible
implications. Depending on the marketer's interest, population figures can be classified to show
specific characteristics of their respective markets. Age distribution and life expectancy correlate
heavily with the level of development of the market.
Income
Markets require not only people but also purchasing power, which is a function of income, prices,
savings, and credit availability. For the marketer to make use of information on gross national
products of various nations, further knowledge is needed on distribution of income. Per capita GNP
is often used as a primary indicator for evaluating purchasing power. In some markets, income
distribution produces wide gaps between population groups. The more developed the economy, the
more income distribution tends to converge toward the middle class.
In general, income figures are useful in the initial screening of markets. However, in product
specific cases, income may not play a major role, and startling scenarios may emerge. Some
products, such as motorcycles and television sets in China, are in demand regardless of their high
price in relation to wages because of their high prestige value.
Consumption Patterns

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Depending on the sophistication of a country's data collection systems, economic data on
consumption patterns can be obtained and analyzed. The share of income spent on necessities will
provide an indication of the market's development level as well as an approximation of how much
money the consumer has left for other purchases. Engel's laws provide some generalizations about
consumers spending patterns. They state that as a family's income increases, the percentage spent
on food will decrease, the percentage spent on housing and household operations will be roughly
constant, and the amount saved or spent on other purchases will increase.
Infrastructure
The availability and quality of an infrastructure is critically important in evaluating marketing
operations abroad. Each international marketer will rely heavily on services provided by the local
market for transportation, communication, and energy as well as on organizations participating in
the facilitating functions of marketing: marketing communications, distributing, information, and
financing.
Foreign Involvement in the Economy
For the international marketer interested in entering a foreign market, it is important to know the
extent to which such entry is accepted by a country. An economy's overall acceptance of foreign
involvement can be estimated by analyzing the degree of foreign direct investment by country and
by industry in a given market as well as by the rules governing such investment.
2.4.2. Socio-Cultural Environment
The socio - cultural environment influences the behavior of customers who comprise markets, the
managers who plan and implement international marketing programs, and the marketing
intermediaries who participate in international marketing process. Culture should not be simply
considered as an obstacle to doing business across cultures. Culture can provide tangible benefits
and can be used as a competitive tool or as a basis of a competitive strategy. In short, cultural
differences can, and should be managed. It is when they are mismanaged that problems arise and
profits are adversely affected.

2.4.2.1. Basic Aspects of Society and Culture

Anthropologists and sociologists define culture as “Ways of Living “, built up by a group of human
beings, which are transmitted from one generation to another. A culture acts out its ways of living
in the context of social institutions, including family, educational, religious, governmental, and
business institutions. Culture includes conscious and unconscious values, ideas, attitudes, and
symbols that shape human behavior and that are transmitted from one generation to the next. In this
sense, culture does not include one-time solutions to unique problems, or passing fads and styles.

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As defined by organizational anthropologist Geert Hofstede, culture is “the collective programming
of the mind that distinguishes the members of one category of people from those of another”.

Subculture
Because of differing cultures, worldwide consumer homogeneity does not exist. Neither does it
exist in the United States. Differences in consumer groups are everywhere. There are white, black,
Jewish, Catholic, farmer, truck driver, young, old, eastern, and western consumers, among other
numerous groups. In order to understand these diverse groups of consumers, particular cultures
must be examined. As the focus is on a subgroup within a society, the more appropriate area for
investigation is not culture itself but rather subculture, culture on a smaller and more specific level.
Subculture is:
Ä A distinct and identifiable cultural group that has values in common with the overall society but
also has certain characteristics that are unique to itself.
Ä Group of people within a larger society. Although the various subcultures share some basic
traits of the wider culture, they also preserve their own customs and lifestyles, making them
significantly different from other groups within the larger culture of which they are a part.
There are many different ways to classify subcultures. Although race or ethnic origin is one obvious
way, it is not the only one. Other demographic and social variables can be just as suitable for
establishing subcultures within a nation.

2.4.2.2. Culture and Its Characteristics

1. Culture is prescriptive. It prescribes the kinds of behavior considered acceptable in the society.
The prescriptive characteristic of culture simplifies a consumer’s decision making process by
limiting product choices to those which are socially acceptable.
2. Culture is socially shared. Culture, out of necessity, must be based on social interaction and
creation. It cannot exist by itself. It must be shared by members of a society, thus acting to
reinforce culture’s prescriptive nature.
3. Culture facilitates communication. One useful function provided by culture is to facilitate
communication. Culture usually imposes common habits of thought and feeling among people.
Thus, within a given group culture makes it easier for people to communicate with one another.
But culture may also impede communication across groups because of a lack of shared common
cultural values.
4. Culture is learned. Culture is not inherited genetically-it must be learned and acquired.
Socialization or enculturation occurs when a person absorbs or learns the culture in which he

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or she is raised. In contrast, if a person learns the culture of a society other than the one in which
he or she was raised, the process of acculturation occurs. The ability to learn culture makes it
possible to absorb new cultural trends.
5. Culture is subjective. People in different cultures often have different ideas about the same
object. What is acceptable in one culture may not necessarily be so in another. In this regard,
culture is both unique and arbitrary.
6. Culture is enduring. Because culture is shared and passed along from generation to generation,
it is relatively stable and somewhat permanent. Old habits are hard to break, and people tend to
maintain its own heritage in spite of a continuously changing world.
7. Culture is cumulative. Culture is based on hundreds or even thousands of years of accumulated
circumstances. Each generation adds something of its own to the culture before passing the
heritage on to the next generation.
8. Culture is dynamic. Culture is passed along from generation to generation, but one should not
assume that culture is static and immune to change. Far from being the case, culture is
constantly changing-it adapts itself to new situations and new sources of knowledge.
2.4.2.3 Elements of Culture
Culture includes every part of life. The scope of the term culture to the anthropologist is illustrated
by the elements included within the meaning of the term. They are:
A. Material Culture : Technology, Economics
Material Culture is divided into two parts, technology and economics. Technology includes the
techniques used in the creation of material goods; it is the technical know-how possessed by the
people of a society. Material culture affects the level of demand, the quality and types of products
demanded, and their functional features, as well as the means of production of these goods and their
distribution.
Economics is the manner in which people employ their capabilities and the resulting benefits. The
subject of economics includes the production of goods and services, their distribution, consumption,
means of exchange, and the income derived from the creation of utilities.
B. Social Institutions : Social organizations, Education, Political Structures
Social Institutions include social organization, education, and political structures that are concerned
with the ways in which people relate to one another, organize their activities to live in harmony
with one another, teach acceptable behavior to succeeding generations, and govern themselves. The
positions of men and women in society, the family, social classes, group behavior, age groups and
how societies define decency and civility are interpreted differently within every culture. In cultures

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where the social organizations result in close-knit family units, for example, it is more effective to
aim a promotion campaign at the family unit than at individual family members.

Education, one of the most important social institutions, affects all aspects of the culture from
economic development to consumer behavior. The literacy rate of a country is a potent force in
economic development.
C. Humans and the Universe-Belief Systems
Within this category, there are religion (belief systems), superstitions, and their related power
structures. The impact of religion on the value systems of a society and the effect of value systems
on marketing must not be underestimated. Religion impacts people’s habits, their outlook on life,
the products they buy, the way they buy them, even the newspapers they read.
Acceptance of certain types of food, clothing, and behavior are frequently affected by religion, and
such influence can extend to the acceptance or rejection of promotional messages as well. In some
countries, focusing too much attention on bodily functions in advertisements would be judged
immoral or improper and the products would be rejected.
D. Aesthetics : Graphic and Plastic Arts, Folklore, Music, Drama and Dance
Closely interwoven with the effect of people and the universe on a culture are its aesthetics, that is,
its arts, folklore, music, drama, and dance. Aesthetics are of particular interest to the marketer
because of their role in interpreting the symbolic meanings of various methods of artistic
expression, color, and standards of beauty in each culture. Customers everywhere respond to
images, myths, and metaphors that help them define their personal and national identities and
relationships within a context of culture and product benefits. The uniqueness of a culture can be
spotted quickly in symbols having distinct meanings.
Without a culturally correct interpretation of a country’s aesthetic values, a whole host of marketing
problems can arise. Product styling must be aesthetically pleasing to be successful, as must
advertisements and package designs. Insensitivity to aesthetic values can offend, create a negative
impression, and, in general, render marketing efforts ineffective. Strong symbolic meanings may be
overlooked if one is not familiar with a culture’s aesthetic values.
E. Language
The importance of understanding the language of a country cannot be overestimated. The successful
marketer must achieve expert communication, and this requires a thorough understanding of the
language as well as the ability to speak it. Advertising copywriters should be concerned less with
obvious differences between languages and more with the idiomatic meanings expressed. It is not
sufficient to say you want to translate into Spanish, for instance, because, in Spanish speaking Latin

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America the language vocabulary varies widely. Tambo, for example, means a roadside inn in
Bolivia, Colombia, Ecuador, and Peru; in Argentina and Uruguay, it means a dairy farm; and in
Chile, a Tambo is a brothel.

2.5. Political and Legal Environment

2.5.1. Political Environment
Global marketing activities take place within the political environment of governmental institutions,
political parties, and organizations through which a country’s people and rulers exercise power.
Any company doing business outside its home country should carefully study the government
structure in the target country and analyze salient issues arising from the political environment.
These include the governing party’s attitude toward sovereignty, political risk, the threat of equity
dilution, and expropriation.
A. National – States and Sovereignty
Sovereignty can be defined as supreme and independent political authority. Richard Stanley offered
the following concise description. A sovereign state was considered free and independent. It
regulated trade, managed the flow of people into and out of its boundaries, and exercised undivided
jurisdiction over all persons and property within its territory. It has the right, authority, and ability
to conduct its domestic affairs without outside interference and to use it international power and
influence with full discretion.
Government actions taken in the name of sovereignty occur in the context of two important criteria
a country’s state of development and the political and economic system in place in the country.
B. Political risk
The risk of a change in government policy that would adversely impact a company’s ability to
operate effectively and profitably—can deter a company from investing abroad. When the
perceived level of political risk is lower, a country is more likely to attract investment. The level of
political risk is inversely proportional to a country’s stage of economic development all other things
being equal, the less developed a country, the greater the political risk.
C. Dilution of Equity Control
Political pressure for national control of foreign owned companies is a part of the environment of
global business in lower- income countries. The foremost goal of national governance is to protect
the right of national sovereignty, especially in all aspects of domestic business activity. Host nation
governments sometimes attempt to control ownership of foreign owned companies operating within
their borders. In underdeveloped countries, political pressures frequently cause companies to take in
local partners.

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D. Expropriation
The ultimate threat a government can pose toward a company is expropriation. Expropriation refers
to governmental action to dispossess a company or investor. Compensation is generally provided to
foreign investors, although not often in the “prompt, effective, and adequate” manner provided for
by international standard. Nationalization occurs if ownership of the property for by international
standard. Nationalization occurs if ownership of the property or assets in question is referred to as
confiscation.

Political Risks
There are a number of political risks with which marketers must contend. Hazards based on a host
government’s actions include confiscation, expropriation, nationalization, domestication, and
creeping expropriation. Such actions are more likely to be levied against foreign investments,
though local firms’ properties are not totally immune.
1. Confiscation is the process of a government’s taking ownership of a property without
compensation.
2. Expropriation occurs when the government seizes an investment but makes some
reimbursement for the assets. That means, it is the act of a government taking ownership of a
firm’s plants. It differs somewhat from confiscation in that there is some compensation, though
not necessarily just compensation. More often than not, a company whose property is being
expropriated agrees to sell its operations-not by choice but rather because of some explicit or
implied coercion.
3. Nationalization- After property has been confiscated or expropriated, it can be either
nationalized or domesticated. Nationalization involves government ownership, and it is the
government that operates the business being taken over.
4. Domestication In the case of domestication, foreign companies relinquish control and
ownership, either completely or partially, to the nationals. The result is that private entities are
allowed to operate the confiscated or expropriated property. Domestication may sometimes be a
voluntary act that takes place in the absence of confiscation or nationalization. Usually, the
causes of this action are either poor economic performance or social pressures.
MNCs have generally been concerned with coups, revolutions, and confiscation, but they now have
to pay attention to so-called creeping expropriation.

2.5.2. Legal Environment

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Legal Environment: is the environment that frames the rules the game within which firms play their
business strategies. Government set rules and regulation to normalize the business activities while
safeguarding the societal well-being. Many of the rules set by the government may have an adverse
effect on the business. Hence forth, the business firm may be aware of the government rules and
regulation and accordingly abide by it. Every company's conduct is influenced more and more by
the legal process in the society. The legal forces on marketing can be the following:-
Ä Monetary and fiscal policies- Government spending, tax legislation etc.
Ä Social legislation and regulation-Anti pollution law.
Ä Government relationship with industries- Tariffs and import quotas etc.
2.5.2.1 Legal Systems
To understand and appreciate the varying legal philosophies among countries, it is useful to
distinguish between the two major legal systems: common law and statute law.
i) A common law system
A common law system is a legal system that relies heavily on precedents and conventions. Judges’
decisions are guided not so much by statutes as by previous court decisions and interpretations of
what certain laws are or should be.
ii) A statue law system
Countries employing a statute law system, also known as code or civil law, include most continental
European countries and Japan.. Most countries – over 70 – are guided by a statue law legal system.
As the name implies, the main rules of the law are embodied in legislative codes. Every
circumstance is clearly spelled at to indicate what is legal and what is not. There is also a strict and
literal interpretation of the law under this system. Therefore, the only major distinction between the
systems is the freedom of the judge in interpreting laws. A common law country, the judge’s ability
to interpret laws in a personal way gives the judges a great deal of power to apply the laws as it fits
the situation. In contrast, a judge in a civil law country has a lesser role in using personal judgment
to create or interpret laws because the judge must strictly follow the “letter of the law”.
2.5.2.2 Multiplicity of the Legal Systems
Much like the political environment discussed, the multiplicity of legal environments includes:
domestic, foreign, and international legal environments.
i. Domestic legal environment
In the domestic environment, a business person must abide by the laws of the home country. Such
laws can affect both imports and exports. Various countries design their legal system on which one
system differs with others. For instance, in the case of the United States, items that are ‘restricted’

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but not ‘prohibited’ include automobiles, cultural treasures, more than $5000 of cash, firearms,
wildlife and fish. Counterfeit products and illegal drugs cannot be imported, etc.
ii. Foreign legal environment
Once a product crosses a national border, it becomes subject to both an entirely different set of laws
and a new enforcement systems. E.g. France bans all imports of crawfish because of the risk of
disease, etc.
iii. International legal environment
In many cases, agreements between nations must be secured before marketers can enter a particular
market. The airline business provides a good illustration of such agreements. Treaties among
nations govern international air routes.

There is no international law perse that prescribes acceptable and legal behavior of international
business enterprises. There are only national laws – often in conflict with one another, especially
when national politics is involved. This complexity creates a special problem for those companies
that do business in various countries, where various laws may demand contradictory actions.
Because of the complexity of the international legal system, countries enter into an agreement to
overcome such barriers.
2.5.2.3 The Law and Marketing Mix
Government regulations are designed to serve societal interest by preserving business competition
on the one hand and protecting consumers on the other. Such regulations not only increase a
company’s cost of doing business, but also affect its marketing strategies.
i) Product
There are many products that cannot be legally imported into most countries. Examples include
counterfeit money, illicit drugs, pornographic materials, etc. it is usually also illegal to import live
animals and fresh fruits unless accompanied by the required certificates. Furthermore, many
products have to be modified to conform to local laws before these products are allowed to cross the
border. The modification may be quite technical from an engineering standpoint or may only be
cosmetic, as in the case of certain packaging change.
ii) Place
In various countries the restriction in regards to distribution channels differs. As a result it affects
the firms marketing activities. For example, in the USA a manufacturer has a number of distribution
channels from which to choose as long as competition is not stifled in the process. In most other
countries, the manufacture does not have such freedom. In England and Wales, it is legal to buy a

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pornographic book on Sunday but not a Bible; Whisky and Gin but no dried milk in cows; post
cards but not birthday cards etc.
iii) Promotion
There are virtually no limits on how much an advertiser can spend for promotion in the USA, but
free spending is usually regarded as improper elsewhere. Taking the view that advertising is not
necessary for doing business, many countries have direct tax on advertising billings, agencies or
media. Some governments use advertising tax to discourage advertising so that demand and
inflation can be cured. Other government use advertising restrictions as a non tariff barrier to
foreign exports. For instance, Japan does not allow foreign cigarettes to be advertised in the
Japanese language. Another problem that a company must be prepared to deal with is the varying
interpretations that occur with advertisement. What is acceptable to one country may be
‘misleading’ in another.
iii) Price
The general policy for using price control is to protect consumers’ interests or to control inflation.
Generally the company has no choice but to obey the wage and price control imposed by the
government.
2.5.2.4 Intellectual Property
Intellectual property is a general term that describes inventions or other discoveries that have been
registered with government authorities for the sale or use by their owner. Such terms as patent,
trademark, copyright or trade secret fall in to the category of intellectual property. Individuals and
firms have the freedom to own and control the rights to intellectual property (i.e. inventions and
creative works). The term patent, trademark, copyright, and trade secret are often used
interchangeably. In fact, they are four basic forms of intellectual property and hold different
meanings as illustrated below:
i) Trade mark
A trademark is a symbol, work or thing used to identify a product made or marketed by a particular
firm. It becomes a registered trademark when the mark is accepted for registration by the trademark
office.
ii) Copy right
A copy right which is the responsibility of the copyright office in the library of congress, offers
protection against unauthorized copying by others to an author or artist for his/her literary, musical,
dramatic and artistic works. A copyright protects the form of expression rather than the subject
matter.
iii) Patent

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A patent protects an invention of a scientific or technical nature, it is a statutory grant from the
government (the patent office) to an inventor in exchange for public disclosure giving the patent
holder exclusive right to the functional and design inventions patented and excluding other firm
using those inventions for a certain period of time.
iv) Trade secret
The term trade secret refers to know – how (i.e. manufacturing methods, formulas, plans and so on)
that is kept secret with in a particular business. This know – how, generally unknown in the
industry, may offer the firm a competitive advantages.
2.5.2.5 Unfair Competition
Even though, there are firms who would like to enjoy their sweats, there are also businesses who
would like to prosper via short cut. These firms are unfairly competing with their competitors. The
government role in the free market economy is to regulate unfair competition by preserving of the
intellectual properties. Some of the unfair competition takes the following forms:
a) Infringement
Infringement occurs when there is commercial use (i.e. recopying or imitating) without owner's
consent, with the intent of confusing or deceiving the public.
b) Counterfeiting
Counterfeiting is the practice of unauthorized and illegal copying of a product. In essence, it
involves infringement on a patent or trademark or both. I.e. according to the Us Lanham Act, a
counterfeit trademark is a “spurious trade mark, which is identical with, or substantially
indistinguishable from a registered trademark.”
There are several levels of counterfeiting;
1. The true counterfeit product, which uses the name of the original and looks like it.
2. A look – alike or knock off, which duplicates the organize design but does not use its name.
3. Reproduction or replica, a close but not exact copy and
4. Imitation or associative counterfeit, which is a cheap but poor copy of the original.
But, it is illegal use of the name and a product shape that differs little form the original that leads
consumers to associate an imitation with the original.
c) Gray market
A gray market exists when a manufacture ends up with unintended channel of distribution that
performs activities similar to the planned channel – hence the term parallel distribution. Through
this extra channel, gray market goods move, internationally as well as domestically. In an
international context, a gray market product is one imported by an unauthorized party. Products

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notably affected by this method of operation include watches, cameras, automobiles, perfumes and
electronic goods.
d) Bribery
Bribery is both unethical and illegal. A closer look, however, reveals that bribery is not really that
straight forward an issue. There are many questions about what bribery is, how it is used, and why it
is used. The ethical and legal problems associated with bribery can also be quiet complex. I.e.
according to the foreign corrupt practices Act of 1997, bribery is the use of intensive commerce to
offer, pay, promise to pay, or authorize giving anything of value to influence an act or decision by a
foreign government, politician or political party to assist in obtaining, retaining, or directing
business to any person. A bribe is also known as a “pay off” “grease money” “lubricant” “little
envelop” or “bite”, and under – the – table – payment as well as by other terms. A bribe may take
the form of cash, gifts, jobs and free trips.

2.6. Global Trading Environment

2.6.1. The World Trade Organization and GATT
In 1948 when 23 countries underlined in the General Agreement on Tariffs and Trade (GATT) their
determination to reduce import tariffs, this was considered a milestone in international trade
relations. GATT is based on three principles.
Ä The first concerns nondiscrimination, each member country must treat the trade of all other
member countries equally.
Ä The second principle is open markets, which are encouraged by the GATT through a prohibition
of all forms of protection except customs tariff.
Ä The third principle is which prohibits export subsidies on manufactured products and limits the
use of export subsidies on primary products.
In reality, none of these principles is fully realized as yet, although much progress was made during
the Uruguay Round on issues such as no tariff barriers, protection of intellectual property rights,
and government subsidies.

Another major breakthrough at the Uruguay Round was the establishment of the world Trade
Organization (WTO) in 1995, which replaced GATT. In contrast to GATT, which was more loosely
organized, WTO as a permanent institution is endowed with much more decision making power in
undecided cases. These extended competencies have become manifest in visible consequences.
During its 50 years of existence, only 300 complaints in international trade disputes were filed with
GATT, since its installation in 1995, the WTO has already dealt with 200 cases.

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The WTO has statutory powers to adjudicate trade disputes among nations to oversee the smooth
functioning of the multilateral trade accords agreed upon under the Uruguay Round. Its main
function is to ensure that trade flows as smoothly, predictably and freely as possible.

2.6.2. Degrees of Economic Cooperation/Regional Economic Integration

Regional economic integration creates opportunities and potential problems for the international
marketer. It may have an impact on a company's entry mode by favoring direct investment because
one of the basic rationales of integration is to generate favorable conditions for local production and
intraregional trade. By design, larger markets are created with potentially more opportunity.
Because of harmonization efforts, regulations may be standardized, thus positively affecting the
international marketer.
There are four degrees of economic cooperation and integration, as illustrated in table below.
Stage of Elimination of Common Elimination of Harmonization and
Integration Tariffs and External Restrictions on Unification of Economic
Quotas Among Tariff (CET) and Factor Movements and Social Policies and
Members Quota System Institutions

Free Trade Area Yes No No No

Customs Union Yes Yes No No
Common Market Yes Yes Yes No
Economic Union Yes Yes Yes Yes
Table 2.1 Forms of Economic Integration in Regional Markets

Levels of Economic Integration

i. Free Trade Area- Elimination of internal duties
A free trade area (FTA) is formed when two or more countries agree to eliminate tariffs and other
barriers that restrict trade. When trading partners successfully negotiate a free trade agreement
(also abbreviated as FTA), the ultimate goal is to have zero duties on goods that cross borders
between the partners, it creates a free trade area. In some instances, duties are eliminated on the day
the agreement takes effect; in other cases, duties are phased out over a set period of time. Countries
that belong to an FTA can maintain independent trade policies with respect to third countries. Rules
of origin 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; customs
inspectors police the borders between members.
ii. Customs Union- Free trade area + establishment of common barriers

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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). In 1996, for example, the EU and Turkey initiated a customs union in an
effort to boost two-way trade above the average annual level of $20 billion. The arrangement called
for the elimination of tariffs averaging 14 percent that added $1.5 billion each year to the cost of
European goods imported by Turkey. Other customs unions are the Andean Community, the
Central American Integration System (SICA), Mercosur, and CARICOM.
iii. Common Market- Customs union + removal of restrictions on movement of production
factors
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. The Andean Community, the
SICA, and CARICOM, which currently function as customs unions, may ultimately evolve into true
common markets.
iv. Economic Union- Common market + Harmonization of national economic policies + One
money
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, and goods
and services from country to country. An economic union is a common marketplace not only for
goods but also for services and capital. For example, if professionals are going to be able to work
anywhere in the EU, the members must harmonize their practice licensing so that a doctor or lawyer
qualified in one country may practice in any other.

Regional Economic Organizations

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 United States Arab Middle
ASEAN (Association of Southeast Asian Nations): Brunei, Indonesia, Malaysia, the Philippines,
Singapore, Thailand, and Vietnam. Benelux Customs Union: Belgium, the Netherlands, and

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Luxembourg
CAEMC (Central African Economic and Monetary Community): Cameroon, the Central African
Republic, Chad, the 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
CACM (Central American Common Market): Costa Rica, EI Salvador, Guatemala, Honduras,
Nicaragua, and Panama.
CFA Franc Zone: the Comoros, members of the WAEMU, and members of 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
East Arab Common Market: UAR, Iraq, Jordan, Sudan, Syria, and Yemen
ECOWAS (Economic Community of West African States): Benin, Cape Verde, Da-homey, Gambia,
Ghana, Guinea, Guinea-Bissau, Ivory Coast, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal,
Sierra Leone, Togo, and Upper Volta
EU (European Union): Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom
EEA (European Economic Area): Iceland, Norway, and EU members
EFTA (European Free Trade Association): Austria, Finland, Iceland, Liechtenstein, Nor-way, Sweden,
and Switzerland 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 United States
OECD (Organization for Economic Cooperation and Development): EU members, Australia, Canada,
Iceland, Japan, New Zealand, Norway, Switzerland, Turkey, and the United States.
RCD (Regional Cooperation for Development): Iran, Pakistan, and Turkey
WAEMU (West African Economic and Monetary Union): Benin, Burkina Faso, Ivory Coast, Mali,
Niger, Senegal, and Togo.

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