In the post war period, the world economy has increasingly separated itself into trading blocs. Trading blocs have grown in size and some have become more economically integrated...

1. Liz Veal Economax Editor October 2012
Has the global economy become
a bloc-o-holic?
In the post war period, the world economy The trade-creating benefits of joining a trading bloc,
has increasingly separated itself into trading where the loosest agreement is typically to trade
blocs. Trading blocs have grown in size and freely, without barriers such as tariffs and quotas are
some have become more economically well-documented. Free trade – the removal of trade
integrated. barriers – helps create trade. Countries in the
bloc can specialise and exploit their comparative
The UK joined the EEC in 1973 when it was a advantages in production, where they produce at
customs union – free trade within the trading bloc lowest opportunity cost. This specialisation increases
and a common external tariff on imports from non- output from a given set of resources, increasing
members. It became more economically integrated allocative efficiency and improving the standard
as the single market began in 1992 allowing free of living for all bloc members, assumimg the gains
movement of labour and capital and more common from trade are shared out. It also allows businesses
standards for products. Some countries within the to benefit from greater economies of scale, where
EU have taken integration as stage further by using average long run costs fall, enhancing productive
a common currency, the euro. Meanwhile the EU efficiency. As costs fall, prices for consumers decrease
has enlarged, growing in size from the original six too, increasing consumer welfare. Increased
members to the current 27 states. Other prominent competition also promotes invention, innovation
trading blocs are NAFTA, ASEAN, Mercosur, to name and productivity and therefore dynamic efficiency
but a few. But is the growth of trading blocs a cause gains are made. No wonder countries have become
for concern? Does the world need to be weaned off so addicted to their trading blocs!
this bloc obsession? However, while trade within the trading bloc is free,
many blocs impose restrictions on trade with
non-members diverting trade from the world’s most
efficient producers to those inside the bloc where
businesses are protected by a common tariff. The
extent to which trade diversion eats into the gains
from trade creation depends on the size of the tariffs
used and how they compare to those in place before
countries linked up together in the bloc. The tariffs
do raise some revenue so the outcome will also
depend on how this revenue is used by governments.
The World Trade Organisation is promoting trade
liberalisation, not just within trading blocs, but also
between them to minimise any negative impact of
trade diversion.
Joining a trading bloc can make a country more
attractive as a destination for foreign direct investment.
A MNC may be looking for a base inside a trading
bloc so it can sell its goods without restrictions to all
other countries in the bloc. This FDI boosts a country’s
aggregate demand, promoting growth and jobs, while

2. Liz Veal Economax Editor
any demand-pull inflationary pressures are ease as confidence. However, while the wealthy EU trading
the investment also helps increase the economy’s bloc stagnates, other economies, such as the BRICs,
capacity and potential growth rate. Another good and other blocs such as Mercosur, are growing
reason for countries to queue up to become part of faster, reducing global income inequality.
a trading bloc!
So while some blocs thrive, others may not. Within
However this bloc-o-holism has its downside. The blocs, some countries may benefit considerably more
increasing size and integration of blocs makes it than others from the trade creation. The relationships
more difficult to maintain a harmonious relationship may not always be fair or easy. While relations
between members especially when hit by a global between countries inside a bloc may be fractious at
economic shock such as the credit crunch. It may times, relations between blocs can also be hostile,
also impact on the distribution of income both particularly in difficult economic times, when blocs
between blocs and within them. The EU is a case may wish to protect their industries from non-bloc
in point: the Eurozone crisis has stifled any rises in competition. Despite these potential problems, it
living standards and austerity in the Club Med countries seems unlikely that the benefits of joining a trading
is creating tensions between the single European bloc will be wiped out completely, though some UK
currency members. Creditor nations such as Germany Eurosceptics may disagree. The credit crunch shock
and other stronger economies have been somewhat and its aftermath have certainly begun to raise
reluctant to help out their debtors. Even those in the questions about the world’s bloc-o-holism.
EU outside the Eurozone, such as the UK are not
immune from the economic fallout as the UK growth
rate is constantly under threat from a Eurozone
break-up damaging both consumer and business