July 1, 2005

International Scorecard

Metals companies are growing increasingly globalized. As a result, it is essential to stay in tune with rules set by international organizations that affect the cost of doing business.

The alphabet soup of international organizations—IMF, WTO, APEC, NAFTA—can have dramatic impact on North American business. Such organizations touch virtually every nation of the world and affect how much money they have to spend on trade (See chart below) That’s crucial for the United States, which was the world’s second-largest exporter of goods and services in 2004. U.S. exports reached nearly $808 billion of goods exported around the globe. It's also the world's top importer, nearly $1.5 trillion worth, reports the U.S. Department of Commerce.

International organizations can establish rules for trade, bolster economic progress in developing nations or set goals for crude oil prices. “While these organizations may seem far away and abstract, they can have a life and death impact” on the metals industry, says Peter Morici, professor of international business at the University of Maryland. Metals company executives “need to be tuned in because the competition they face is influenced in significant measure by these organizations.”

The WTO, for example, determines the access foreign companies have to the U.S. market, as well as the access American companies have to foreign markets. Meanwhile, programs put in place by the International Monetary Fund (IMF) and World Bank can have a major influence on the growth of emerging markets by providing loans to help finance projects in developing nations.

And there also are the changes in the metals industry itself to keep in mind. Metal fabricators “are growing increasingly globalized,” says George T. Haley, professor of marketing at the University of New Haven in Connecticut. “Not only are they globalized in competition, but they're also globalized in industry structure,” due to consolidations.

For many companies, doing business with emerging markets or setting up operations there is crucial. “They need the most stable economic environment possible so they don't get whipsawed between feast and famine,” Haley says. “The IMF helps stave off the worst of the crises.”

On the regulatory side, international organizations can establish rules that affect the cost of doing business, such as requiring companies to adhere to stricter environmental standards.

To add to the acronyms, in June, the U.S. Senate Finance Committee passed the Central American Free Trade Agreement (CAFTA). CAFTA establishes a free-trade agreement between the United States and Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua.

Peter Koveos, a finance professor at Syracuse University in New York, says agreements such as these “make the playing field a little more level than it is right now.” Signing such pacts does more to open the markets and reduce the tariffs of foreign countries, which tend to be more closed and have higher tariffs than the U.S. market. Not having such agreements in place, Koveos says, “would maintain barriers and keep other markets closed while we keep our markets open.”

  Structure History Goals & Activities Impact on U.S. Business
Asia-Pacific Economic Cooperation (APEC) 21 countries: Australia, Brunei Darussalam, Canada, Chile, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, Chinese Taipei, Thailand, United States, Vietnam.
No treaties; commitments are voluntary.
Founded in 1989 by 12 members, including the United States. Works to facilitate economic growth, cooperation, trade and investment. Focuses on trade and investment liberalization, business facilitation, economic and technical cooperation. Helps eliminate trade barriers and decrease costs of doing business. The APEC nations represent almost one-half of the world’s trade. At their last summit, in November 2004, they threw their weight behind WTO efforts to further lower trade barriers.
European Union (EU) 25 countries: Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, United Kingdom.
Key bodies are the European Parliament, the Council of the European Union and the European Commission.
European integration proposed in 1950 to prevent major wars from recurring on the continent. First agreement signed in 1957—European Economic Community Treaty to integrate trade. Added 10 new members in 2004, including eight former Communist countries. European Commission does day-to-day work of EU and drafts
proposals for new laws.
Council of European Union is the main legislative and decision-
making body. Deals with single market, policies and free movement of goods, persons, services and capital.
European Parliament adopts EU legislation and decides on key international agreements.
Makes and implements common commercial policy toward non-EU members, and seeks to abolish international trade restrictions and lower customs duties. A suit brought by the EU and other nations at the WTO over U.S. government payments to American companies under the Byrd amendment, where U.S. companies benefit from bringing successful cases against foreign companies saying that they sell competitive products at unfairly low prices. As a result, the EU imposes a penalty tariff of 15% on a number of U.S. products. President Bush has urged that the amendment be repealed. A coalition of manufacturers and retailers began pushing for appeal in May.
Federal Reserve (FED) Central bank of the United States. Founded in 1913 with signing of Federal Reserve Act to create a safer monetary and financial system. Controls monetary policy by influencing money and credit conditions; supervises and regulates banking institutions; operates the nation’s payment systems. Sets interest rates; aims to control inflation. Since June, the Fed has raised the short-term interest rate eight times, each time by a quarter percentage point.
G8 Group of eight wealthy nations: United States, United Kingdom, Japan, Germany, France, Canada, Italy, Russia Founded by six countries in 1975. Canada joined the following year; Russia in 1998. The G20 was founded in 1999 at the urging of G8 finance ministers to improve communication between wealthy nations and emerging markets. The G20 includes such countries as China, India and Saudi Arabia. Discusses important global issues and adopts policies on topics
such as changing climate, fighting terrorism and reducing debt
of poor nations.
July’s G8 summit focused on the threat posed by climate change,
successful WTO negotiations and increasing resources for Africa. The G20 deals with subjects such as reforming the IMF and World Bank, and dealing with widening differences in wealth among various parts of the world.
International Monetary Fund (IMF) 184 member countries. Proposed at a United Nations conference in Bretton Woods, New Hampshire, in 1944, launched in 1945. Works to foster global monetary cooperation and facilitate international trade. Annually reviews countries’ economic situations and offers technical assistance. Also provides financial assistance to
correct balance of payment problems. Currently has $90 billion in outstanding loans to 82 countries.
Ensures stability of international monetary and financial system to enable trade to take place between countries, and helps promote economic stability. Economic powers such as the United States want poor nations’ debt to institutions such as the IMF abolished to free up more money for development. This could boost the demand for goods in these countries.
North American Free Trade Agreement (NAFTA) Free trade arrangement between the United States, Canada and Mexico. Signed in 1992, entered into force Jan. 1, 1994. Lowers trade barriers and eases cross-border movement of goods and services. Many tariffs eliminated immediately, others phased
out over five to 15 years.
Facilitates trade among the three countries and eases movement of business travelers. The economic success of NAFTA has prompted widespread debate, but Bush administration officials say the U.S. economy has grown nearly 40% since NAFTA took effect. It is cited by both sides in discussions over the proposed Central American Free Trade Agreement.
Organisation for Economic Co-Operation and Development (OECD) 30 member countries: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, The Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, U.K., U.S. Relationships with 70 others. Grew out of the Organisation for European Economic Co-operation (OEEC), set up in 1947 to administer the Marshall Plan. Intended as the economic counterpart to NATO, founded Dec. 14, 1960, by 20 countries. Publications and statistics on economic and social issues. Intends to help governments reach strategic goals of prosperity, economic stability and the elimination of poverty. At certain times and on certain issues, provides a neutral forum for discussion and debate such as the debate in recent years about how to retire excess steelmaking capacity globally. Sets no policy but uses peer pressure to improve policies and implement what it calls “soft law.”
Organization of the Petroleum Exporting Countries (OPEC) 11 oil-producing and exporting countries: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela. Founded in 1960 with five members. Coordinates and unifies petroleum policies of member countries and works to ensure stable oil prices on international markets. Sets quotas for how much oil each country should produce, which affects supplies and prices. Recent staggering oil prices are blamed for putting a damper on world economic growth. Oil producers have been boosting output since March in order to create stockpiles ahead of expected heavy fourth-quarter demand.
World Bank UN agency with 184 member countries. Comprised of International Bank for Reconstruction and Development (IBRD), International Development Association (IDA). IBRD established in 1945; IDA established in 1960. IDA provides grants, interest-free loans, technical assistance so
poorest countries can provide basic services. Awarded $9 billion to
62 countries in 2004.
IBRD provides loans to developing countries with higher incomes for
programs designed to reduce poverty, protect the environment and promote economic development to improve living standards. Provided $11 billion in loans to 33 countries in 2004.
Programs work to reduce trade barriers; improving living standards allows the purchase of more goods and services. Also provides funds to improve trade-related infrastructure such as ports and customs services. As with the IMF, economic leaders want to eliminate poor countries’ debt to the World Bank so the countries will have more money to spend on development.
World Trade Organization (WTO) 148 countries accounting for more than 97% of the
world’s trade.
Launched in 1995, the successor to the General Agreement on Tariffs and Trade (GATT), established after World War II. Only international organization dealing with the global rules of trade between nations. Administers trade agreements and helps settle trade disputes. Works to ensure smooth flow of trade, acts as a forum for trade negotiations and issues judgments for trade disputes. Successfully concluding the current Doha Round of talks would add $50 billion to the world economy by 2015, reports the World Bank.
There are many more international institutions and agreements that play a role in the world economy, but have a more limited impact on North American business. The Association of Southeast Asian Nations (ASEAN), for instance, is designed to accelerate economic growth in the region and includes 10 countries, such as Indonesia and Singapore.