Chapter 18 International Managerial Finance

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North American Free Trade Agreement (NAFTA) The treaty establishing free trade and open markets between Canada, Mexico, and the United States. Central American Free Trade Agreement (CAFTA) A trade agreement signed in 2003–2004 by the United States and five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua). European Union (EU) A significant economic force currently made up of 25 nations that permit free trade within the union. European Open Market The transformation of the European Union into a single market at year-end 1992. euro A single currency adopted on January 1, 1999, by 12 EU nations, which switched to a single set of euro bills and coins on January 1, 2002. monetary union The official melding of the national currencies of the EU nations into one currency, the euro, on January 1, 2002. Mercosur Group A major South American trading bloc that includes countries that account for more than half of total Latin American GDP. CHAPTER 18 International Managerial Finance 793 forging very close financial and economic ties with the United States and with each other. In 1988, Canada and the United States negotiated essentially unrestricted trade between their countries, and this free-trade zone was extended to include Mexico in late 1992 when the North American Free Trade Agreement (NAFTA) was signed by the presidents of the United States and Mexico and the prime minister of Canada. NAFTA was ratified by the U.S. Congress in November 1993. This trade pact simply mirrors underlying economic reality— Canada and Mexico are among the United States’ largest trading partners. In 2003–2004, the United States signed a bilateral trade deal with Chile and also a regional pact, known as the Central American Free Trade Agreement (CAFTA), with the Dominican Republic and five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua). The European Union, or EU, has been in existence since 1956. It has a current membership of 25 nations. With a total population estimated at more than 430 million (compared to the U.S. population of about 295 million) and an overall gross national income paralleling that of the United States, the EU is a significant global economic force. Via a series of major economic, monetary, financial, and legal provisions set forth by the member countries during the 1980s, the countries of Western Europe opened a new era of free trade within the union when intraregional tariff barriers fell at the end of 1992. This transformation is commonly called the European Open Market. Although the EU has managed to reach agreement on most of these provisions, debates continue on certain other aspects (some key), including those related to automobile production and imports, monetary union, taxes, and workers’ rights. As a result of the Maastricht Treaty of 1991, 12 EU nations adopted a single currency, the euro, as a continentwide medium of exchange beginning January 1, 1999. Beginning January 1, 2002, 12 EU nations switched to a single set of euro bills and coins, causing the national currencies of all 12 countries participating in monetary union to slowly disappear in the following months. At the same time that the European Union implemented monetary union (which also involved creating a new European Central Bank), the EU had to deal with a wave of new applicants, resulting in the May 1, 2004, admission of 10 new members from eastern Europe and the Mediterranean region. The rapidly emerging new community of Europe offers both challenges and opportunities to a variety of players, including multinational firms. MNCs, especially those based in the United States, today face heightened levels of competition when operating inside the EU. As more of the existing restrictions and regulations are eliminated, for instance, U.S. multinationals will have to face other MNCs, some from within the EU itself. The third major trading bloc that arose during the 1990s is the Mercosur Group of countries in South America. Beginning in 1991, the nations of Brazil, Argentina, Paraguay, and Uruguay began removing tariffs and other barriers to intraregional trade. The second stage of Mercosur’s development, which began at the end of 1994, involved the development of a customs union to impose a common tariff on external trade while enforcing uniform and lower tariffs on intragroup trade. The long-term importance of Mercosur, CAFTA, and other regional and bilateral trade agreements will be influenced by the decisions of the U.S. Congress in expanding the “reach” of NAFTA, as well as by other hemispheric and global economic developments and agreements. In any case, the Mercosur countries represent well over half of total Latin American GDP, and
794 PART SIX Special Topics in Managerial Finance General Agreement on Tariffs and Trade (GATT) A treaty that has governed world trade throughout most of the postwar era; it extends free-trading rules to broad areas of economic activity and is policed by the World Trade Organization (WTO). World Trade Organization (WTO) International body that polices world trading practices and mediates disputes between member countries. joint venture A partnership under which the participants have contractually agreed to contribute specified amounts of money and expertise in exchange for stated proportions of ownership and profit. thus they will loom large in the plans of any MNC that wishes to access the growth markets of this region. U.S. companies can benefit from the formation of regional and bilateral trade pacts, but only if they are prepared to exploit them. They must offer a desirable mix of products to a collection of varied consumers and be ready to take advantage of a variety of currencies and of financial markets and instruments (such as the Euroequities discussed later in this chapter). They must staff their operations with the appropriate combination of local and foreign personnel and, when necessary, enter into joint ventures and strategic alliances. GATT and the WTO Although it may seem that the world is splitting into a handful of trading blocs, this is less of a danger than it may appear to be, because many international treaties are in force that guarantee relatively open access to at least the largest economies. The most important such treaty is the General Agreement on Tariffs and Trade (GATT). In 1994, Congress ratified the most recent version of this treaty, which has governed world trade throughout most of the postwar era. The current agreement extends free-trading rules to broad areas of economic activity—such as agriculture, financial services, and intellectual property rights— that had not previously been covered by international treaty and were thus effectively off-limits to foreign competition. The 1994 GATT treaty also established a new international body, the World Trade Organization (WTO), to police world trading practices and to mediate disputes between member countries. The WTO began operating in January 1995. In 2004, preliminary approvals were granted for an eventual membership of the Russian Federation in the WTO. As more countries join the WTO, the long-term prospects are expected to improve for trade and economic performance around the world. In December 2001, the People’s Republic of China was, after years of controversy, granted membership. Now that China’s status is resolved, there is an improved chance for stability in world trading patterns, in spite of the stunning collapse of several East Asian economies that began in July 1997. Legal Forms of Business Organization In many countries outside the United States, operating a foreign business as a subsidiary or affiliate can take two forms, both similar to the U.S. corporation. In German-speaking nations the two forms are the Aktiengesellschaft (A.G.) or the Gesellschaft mit beschrankter Haftung (GmbH). In many other countries the similar forms are a Société Anonyme (S.A.) or a Société à Responsibilité Limitée (S.A.R.L.). The A.G. and the S.A. are the most common forms, but the GmbH and the S.A.R.L. require fewer formalities for formation and operation. Although establishing a business in a form such as the S.A. can involve most of the provisions that govern a U.S.-based corporation, to operate in many foreign countries, it is often essential to enter into joint-venture business agreements with private investors or with government-based agencies of the host country. A joint venture is a partnership under which the participants have contractually
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