Trade BlocksTrade Blocks

Section 4.3Section 4.3

What is a trade What is a trade block?block?

A group of countries that A group of countries that try to get the benefits of try to get the benefits of free trade by forming a free trade by forming a free trade area or a custom free trade area or a custom union with other countries union with other countries with similar interests. with similar interests.

In This Lesson We Will Talk In This Lesson We Will Talk AboutAbout

►Free trade areasFree trade areas►Custom unionsCustom unions►Common marketsCommon markets►ExamplesExamples►Advantages of trade blocksAdvantages of trade blocks►Disadvantages of trade blocksDisadvantages of trade blocks

Free Trade Area Free Trade Area (FTA)(FTA)

A group of countries who agree to A group of countries who agree to eliminate trade barriers between eliminate trade barriers between members, while retaining members, while retaining independent tariff systems with non-independent tariff systems with non-members.members. e.g NAFTA, COMESA, ASEANe.g NAFTA, COMESA, ASEAN Some sectors may remain exempt Some sectors may remain exempt

from free trade provisions (agriculture)from free trade provisions (agriculture)

Custom UnionCustom UnionA Group of two or more A Group of two or more independent countries who independent countries who agree to abolish trade barriers agree to abolish trade barriers (tariffs and quotas) between (tariffs and quotas) between members, while adopting a members, while adopting a common external tariff with common external tariff with non-membersnon-members..

Common MarketCommon Market►A fully integrated market area A fully integrated market area

allowing free trade for members as allowing free trade for members as well as labor and capital mobility. A well as labor and capital mobility. A common market may also adopt a common market may also adopt a common currency (e.g. Euro).common currency (e.g. Euro).

►Economic ConvergenceEconomic Convergence Member countries usually have a set Member countries usually have a set

of common economic targetsof common economic targets e.g. Fiscal deficit should remain under e.g. Fiscal deficit should remain under

3% of GDP for all EU members3% of GDP for all EU members

Examples of Trade BlocksExamples of Trade Blocks► EUEU

Austria, Finland, Greece, Luxembourg, Spain, Belgium, France, Ireland, Netherlands, Sweden, Denmark, Germany, Italy, Portugal, United Kingdom, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia

►NAFTANAFTAUS, Canada, MexicoUS, Canada, Mexico

►ASEANASEANIndonesia, Malaysia, Brunei, Philippines, Singapore, Indonesia, Malaysia, Brunei, Philippines, Singapore, Thailand, Cambodia, Laos, Myanmar, VietnamThailand, Cambodia, Laos, Myanmar, Vietnam

►MERCOSURMERCOSURArgentina, Brazil, Uruguay, ParaguayArgentina, Brazil, Uruguay, Paraguay

Advantages of Trade BlocksAdvantages of Trade Blocks

►Increased market sizeIncreased market size Trade creationTrade creation

►Specialization results in a more Specialization results in a more efficient allocation of resourcesefficient allocation of resources

►Exploitation of economies of scaleExploitation of economies of scale Specialization results in large scale Specialization results in large scale

production, which in turn results in production, which in turn results in cost reductions when economies of cost reductions when economies of scale are present.scale are present.

Advantages of Trade BlocksAdvantages of Trade Blocks

►Increased competition results in lower Increased competition results in lower prices, which benefit consumersprices, which benefit consumers

►Greater choicesGreater choices►Improvement in quality due to the Improvement in quality due to the

exposure to more competitionexposure to more competition►More rapid spread of technology More rapid spread of technology

among membersamong members►Prevent wars due to the creation of Prevent wars due to the creation of

common interestscommon interests

Advantages in the Context Advantages in the Context of a Global Economyof a Global Economy

►Members of trade blocks may be Members of trade blocks may be able to negotiate better trade terms able to negotiate better trade terms with the rest of the world than as with the rest of the world than as individual nationsindividual nations

►Trade blocks may result in greater Trade blocks may result in greater labor mobility and hence help reduce labor mobility and hence help reduce unemployment in member nationsunemployment in member nations

Advantages in the Context Advantages in the Context of a Global Economyof a Global Economy

►Trade block membership may encourage Trade block membership may encourage FDIFDI

FDI: Investment owned and operated FDI: Investment owned and operated by a foreign country.by a foreign country.

e.g. a multinational corporation builds e.g. a multinational corporation builds a plant in the countrya plant in the country

►Trade blocks may provide greater Trade blocks may provide greater currency stabilitycurrency stability

Disadvantages of Trade Disadvantages of Trade BlocksBlocks

►Resources may flow to the more Resources may flow to the more efficient larger countries to the efficient larger countries to the detriment of smaller membersdetriment of smaller members

►It may encourage mergers and It may encourage mergers and takeovers leading to greater takeovers leading to greater oligopolistic collusionoligopolistic collusion

Disadvantages of Trade Disadvantages of Trade BlocksBlocks

►Costs of economic Costs of economic convergence may be very high convergence may be very high for some trading nationsfor some trading nations Adopting a deflationary policy to Adopting a deflationary policy to

keep inflation low (to meet keep inflation low (to meet target) may come at the target) may come at the expense of growthexpense of growth

Disadvantages in the Context of Disadvantages in the Context of a Global Economya Global Economy

►Tensions may arise between trading Tensions may arise between trading blocks on the one hand and global blocks on the one hand and global institutions such as the WTO on the institutions such as the WTO on the other.other. The WTO aims at abolishing tariffs and The WTO aims at abolishing tariffs and

NTBs between NTBs between allall member countries and member countries and requires members to treat all other requires members to treat all other members on most favored nation (MFN) members on most favored nation (MFN) basis.basis.

World Trade World Trade OrganizationOrganization

►Role of WTO:Role of WTO: Abolish trade barriers (both tariff and Abolish trade barriers (both tariff and

NTB) between countriesNTB) between countries No preferential treatment is allowed; No preferential treatment is allowed;

treat all other countries on most treat all other countries on most favored nation (MFN) basisfavored nation (MFN) basis

Settle trade disputesSettle trade disputes

The EndThe End