Startup

Regional Trading Blocs & Its Types

REGIONAL TRADING BLOCS: A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, (tariffs & non-tariff barriers) are reduced or eliminated among the participating states. A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non-members. A trade bloc is basically a free-trade zone, or near-free-trade zone, formed by one or more tax, tariff, & trade agreements between two or more countries. The Trading blocs are a form of economic integration, & increasingly shape the pattern of the world trade. Regional trade blocks promote the trade within the block & defend its members against global competition. Defense against the global competition is obtained through established tariffs on goods produced by member states, import quotas, government subsidies, onerous bureaucratic import processes, & technical & other non-tariff barriers. Since trade is not an isolated activity, member states within regional blocks also cooperate in economic, political, security, climatic, & other issues affecting the region. Members of successful trade blocs usually share four common traits: similar levels of per capita GNP, geographic proximity, similar or compatible trading regimes, & political commitment to the regional organization. Advocates of the worldwide free trade are usually opposed to the trading blocs, which they argue & encourage regional trade as opposed to the global free trade.

Types of Regional Trading Blocs

Trade blocs can be stand-alone agreements between several states (such as the North American Free Trade Agreement (NAFTA) or part of a regional organization (such as the European Union). Depending on the level of economic integration, the trade blocs can fall into the 6 different categories, such as preferential trading areas, the free trade areas, the customs unions, the common markets, the economic union & the monetary unions, & the political union.

• Preferential Trade Area: Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. This is often the first small step towards the creation of a trading bloc.
• Free trade area: Free Trade Areas (FTAs) are created when 2 or more countries in a region agree to reduce or eliminate barriers to trade on all the goods coming from other members. This is the most basic form of economic cooperation. Member countries remove all barriers to trade among themselves but are free to independently determine trade policies with nonmember nations. An example is the North American Free Trade Agreement (NAFTA).
• Customs union: This type provides for economic cooperation as in a free-trade zone. Barriers to trade are removed between member countries. The primary difference from the free trade area is that members agree to treat trade with non-member countries in a similar manner. The customs union involves the removal of the tariff barriers among the members, as well as the acceptance of the common (unified) external tariff in contradiction to the non-members. This means that the members may negotiate as a single bloc with third parties, such as with other trading blocs, or with the WTO. The Gulf Cooperation Council (GCC)^[1] Cooperation Council for the Arab States of the Gulf is an example.
• Common market: A ‘common market’ is the first significant step towards full economic integration, & occurs when member countries trade freely in all economic resources – not just tangible goods. This means that all barriers to trade in goods, services, capital, & labor are removed. In addition, as well as removing tariffs, non-tariff barriers are also reduced & eliminated. For a common market to be successful there must also be a significant level of harmonization of macroeconomic policies, & common rules regarding monopoly power & other anti-competitive practices. There may also be common policies affecting key industries, such as the Common Agricultural Policy^[2] (CAP) & Common Fisheries Policy (CFP) of the European Single Market (ESM). This type allows for the creation of economically integrated markets between member countries. Trade barriers are removed, as are any restrictions on the movement of labor & capital between member countries. Like customs unions, there is a common trade policy for trade with nonmember nations. The primary advantage to the workers is that they no longer need the visa or work permit to work in another member country of the common market. An example is the Common Market for Eastern & Southern Africa (COMESA).
• Economic & monetary union: This type is created when countries enter into an economic agreement to remove barriers to trade & adopt common economic policies. An example is the European Union (EU). Monetary union is a type of trade bloc which is composed of an economic union (common market & customs union) with a monetary union. Monetary union is established through a currency-related trade pact. An intermediate step between pure monetary union & a complete economic integration is the fiscal union. Economic & Monetary Union of the European Union with the Euro for the Euro-zone members is the example of monetary union.
• Political union: In order to be successful the more advanced integration steps are typically accompanied by the unification of economic policies (tax, social welfare benefits, etc.), reductions in the rest of the trade barriers, introduction of the supranational bodies, & gradual moves towards the final stage, a “political union”. Political union is a final stage in the economic integration with more formal political links among the countries. A limited form of the political union may exist when two or more countries share common decision-making bodies & have common policies. It is the unification of previously separate nations. The unification of West & East Germany in 1990 is an example of the total political union.

Advantages of Regional Trading Blocs

• Free trade within the bloc: Knowing that they have free access to each other’s markets, members are encouraged to specialize. This means that, at a regional level, there is the wider application of the principle of the comparative advantage.
• Market access & trade creation: Easier access to each other’s markets means that trade between members is likely to increase. Trade creation exists when free trade enables high-cost domestic producers to be replaced by lower-cost, & more efficient imports. Because low-cost imports lead to lower-priced imports, there is a ‘consumption effect’, with increased demand resulting from lower prices. These agreements create more opportunities for countries to trade with one another by removing the barriers to trade & investment. Due to a reduction or removal of tariffs, cooperation results in cheaper prices for consumers in the bloc countries.
• Economies of scale: Producers can benefit from the application of scale economies, which will lead to lower costs & lower prices for consumers.
• Jobs: Jobs may be created as the consequence of increased trade among the member economies. By removing the restrictions on the labor movement, economic integration can help expand job opportunities.
• Protection: Firms inside the bloc are protected from cheaper imports from outside, such as the protection of the EU shoe industry from cheap imports from China & Vietnam.
• Consensus & cooperation: Member nations may find it easier to agree with smaller numbers of countries. Regional understanding & similarities may also facilitate closer political cooperation.

DISADVANTAGES OF REGIONAL TRADING BLOCS

• Loss of benefits: The benefits of free trade among the countries in different blocs is lost.
• Distortion of trade: Trading blocs are likely to distort world trade, & reduce the beneficial effects of specialization & the exploitation of comparative advantage.
• Inefficiencies & trade diversion: Inefficient producers within the bloc can be protected from more efficient ones outside the bloc. For example, inefficient European farmers could be protected from low-cost imports from developing countries.

Trade diversion arises when the trade is diverted away from efficient producers who are based outside the trading area. The flip side to trade creation is trade diversion. The member countries may trade more with each other than with nonmember nations. This might mean increased trade with less efficient or more expensive producer because it is in a member country. In this sense, weaker companies can be protected inadvertently with the bloc agreement acting as a trade barrier. In essence, the regional agreements have formed new trade barriers with countries outside of the trading block.

• Retaliation: The development of 1 regional trading bloc is likely to stimulate the development of others. This can lead to the trade disputes, such as those between the EU & NAFTA, including the recent Boeing (US)/ Airbus (EU) dispute. The EU & US have a long history of the trade disputes, together with the dispute over US steel tariffs, which were declared illegal by the WTO in 2005.
• Employment shifts & reductions: Countries may move production to cheaper labor markets in member countries. Similarly, workers may move to gain access to better jobs & wages. Sudden shifts in employment can tax the resources of the member countries.