Trading blocs


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Trading blocs

  1. 1. Trading blocsA regional trading bloc is a group of countries within a geographical region that protectthemselves from imports from non-members. Trading blocs are a form of economic integration,and increasingly shape the pattern of world trade. There are several types of trading bloc:Preferential Trade AreaPreferential Trade Areas (PTAs) exist when countries within a geographical region agree toreduce 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 AreaFree Trade Areas (FTAs) are created when two or more countries in a region agree to reduce oreliminate barriers to trade on all goods coming from other members.Customs UnionA customs union involves the removal of tariff barriers between members, plus the acceptance ofa common (unified) external tariff against non-members. This means that members maynegotiate as a single bloc with 3rd parties, such as with other trading blocs, or with the WTO.Common MarketA ‘common market’ is the first significant step towards full economic integration, and occurswhen member countries trade freely in all economic resources – not just tangible goods. Thismeans that all barriers to trade in goods, services, capital, and labour are removed. In addition, aswell as removing tariffs, non-tariff barriers are also reduced and eliminated. For a commonmarket to be successful there must also be a significant level of harmonisation of micro-economic policies, and common rules regarding monopoly power and other anti-competitivepractices. There may also be common policies affecting key industries, such as the CommonAgricultural Policy (CAP) and Common Fisheries Policy (CFP) of the European SingleMarket (ESM).The European Union (EU)The EU is the world’s largest trading bloc, and second largest economy, after the USA.
  2. 2. The EU was originally called the Economic Community (Common Market, or The Six) after itsformation following the Treaty of Rome in 1957. The original six members were Germany,France, Italy, Belgium, Netherlands, and Luxembourg.The initial aim was to create a single market for goods, services, capital, and labour byeliminating barriers to trade and promoting free trade between members.In terms of dealing with non-members, common tariff barriers were erected against cheapimports, such as those from Japan, whose goods prices were artificially low because of theundervalued yen.By 2009, following continuous enlargement, the EU had 27 members: Austria Germany Norway Belgium Greece Poland Bulgaria Ireland Portugal Cyprus Italy Romania Czech Republic Latvia Spain Denmark Lithuania Slovenia Estonia Luxembourg Slovakia Finland Malta Sweden France Netherlands UKThe main advantages for members of trading blocsFree trade within the blocKnowing that they have free access to each others markets, members are encouraged tospecialise. This means that, at the regional level, there is a wider application of the principle ofcomparative advantage.Market access and trade creationEasier 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 bylower cost, and more efficient imports. Because low cost imports lead to lower priced imports,there is a consumption effect, with increased demand resulting from lower prices.See: Trade creation and trade diversion
  3. 3. Economies of scaleProducers can benefit from the application of scale economies, which will lead to lower costsand lower prices for consumers.JobsJobs may be created as a consequence of increased trade between member economies.ProtectionFirms inside the bloc are protected from cheaper imports from outside, such as the protection ofthe EU shoe industry from cheap imports from China and Vietnam.The main disadvantages of trading blocsLoss of benefitsThe benefits of free trade between countries in different blocs is lost.Distortion of tradeTrading blocs are likely to distort world trade, and reduce the beneficial effects of specialisationand the exploitation of comparative advantage.Inefficiencies and trade diversionInefficient producers within the bloc can be protected from more efficient ones outside the bloc.For example, inefficient European farmers may be protected from low-cost imports fromdeveloping countries. Trade diversion arises when trade is diverted away from efficientproducers who are based outside the trading area.See: Trade creation and trade diversion.See: EU Sugar CaseRetaliationThe development of one regional trading bloc is likely to stimulate the development of others.This can lead to trade disputes, such as those between the EU and NAFTA, including the recentBoeing (US)/Airbus (EU) dispute. The EU and US have a long history of trade disputes,including the dispute over US steel tariffs, which were declared illegal by the WTO in 2005. Inaddition, there are the so-called beef wars with the US applying £60m tariffs on EU beef inresponse to the EU’s ban on US beef treated with hormones; and complaints to the WTO ofeach other’s generous agricultural support.During the 1970s many former UK colonies formed their own trading blocs in reaction to the UKjoining the European common market.