Trade Agreements

  • Overview: Many countries establish trade agreements to promote free trade, yet the World Trade Organization (WTO) cautions against such blocs due to potential high trade barriers for non-member nations.

  • Impact on Businesses: Firms within trade agreement areas benefit from reduced barriers, while external firms face challenges, as seen with Japanese car manufacturers in the EU to circumvent quotas.

Types of Trade Agreements
1. Bi-lateral and Multi-lateral Trade Agreements
  • Defined as agreements between two or more countries to remove quotas and tariffs on most goods.
  • Examples:
    • Closer Economic Relations (CER) between Australia and New Zealand.
    • Costa Rica and South Korea's free trade agreement (Nov 2019).
2. Free Trade Areas (FTAs)
  • When members of a multi-lateral agreement are in close geographical proximity, it is labeled as a free trade area.
  • Examples:
    • United States - Mexico - Canada Agreement (USMCA) which replaced NAFTA in 2020.
    • ASEAN Free Trade Area (AFTA) includes members like Indonesia, Thailand, and others in Southeast Asia.
3. Customs Unions

  • A customs union expands upon a free trade area by implementing a common external tariff on non-members. Member countries coordinate external trade policies, but may have different import quotas.

  • Example: Mercosur (Brazil, Argentina, Uruguay, Paraguay, Venezuela).

  • Transitioning from an FTA to a customs union helps eliminate trade distortions (e.g., varying export rules).

4. Single Markets (Economic Communities)
  • Single markets extend free trade areas with common product regulations and free movement of goods, services, labor, and capital.
  • Examples:
    • Economic Community of West African States (ECOWAS).
    • European Union (EU) and the European Economic Area (EEA).
  • Note: A single market can coexist with a customs union but doesn't have to.
5. Economic Unions
  • An economic and monetary union is a single market that operates with a common currency.
  • Examples:
    • Eurozone, comprising EU nations using the Euro.
    • West African Economic and Monetary Union (UEMOA) using CFA Franc.
Arguments on Regional Trading Blocs
  • Support for Blocs: Encourage trade via policy harmonization and reduced prices due to less trade restriction.
  • Opposition: Might lead to trade diversion, where member nations prefer intra-bloc goods over cheaper external options.
  • Concerns: Can create regional protectionist attitudes leading to conflict among blocs (e.g., NAFTA vs. EU steel import complaints).

Balance of Payments

4.1 Definition
  • Concept: Account of a nation's financial transactions with the rest of the world over a specified period, split into three parts:
    • Current Account (goods/services)
    • Capital Account (fixed asset acquisition/disposal)
    • Financial Account (cash flows)
4.2 Current Account
  • Comprises:
    • Visible Trade: Goods exchanged (physical products).
    • Invisible Trade: Services, investment income, and transfers.
  • Surplus/Deficit: A surplus indicates economic prosperity; the UK's current account has been in deficit since the early 1980s.
4.3 Capital and Financial Accounts
  • Document transactions of external assets and liabilities by firms, individuals, and governments, including balancing for errors/omissions in data collection.

External Analysis of the Macro Environment

  • Importance: Necessary for organizations to adapt strategies based on external factors affecting competition, opportunities, and threats.
  • Tools: PESTEL analysis is key for assessing macro-environmental factors affecting organizational strategies.
PESTEL Analysis
  • Political: Government policies, legislation changes.
  • Economic: Domestic and international economic conditions (e.g., GDP changes, consumer spending).
  • Social: Attitudes, values, and demographic shifts, including cultural impacts.
  • Technological: Innovations affecting product development and supply chains.
  • Environmental: Organizational impact on nature (pollution, sustainability).
  • Legal: Changes in regulatory frameworks impacting operations (e.g., competition laws).
Example Application of PESTEL for Newspapers
  • Political Influences: Tax treatments affecting sales.
  • Economic Influences: Impact of currency strength and economic recession on profitability.
  • Social Influences: Shifts towards online news and varied consumer preferences.
  • Technological Influences: Emergence of digital platforms threatening traditional newspaper sales.
  • Environmental Influences: Criticism regarding sustainability of paper usage.
  • Legal Influences: Restrictions on publication content affecting competitiveness.