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Regional Trade Blocs

Nov 20, 2014



Trade BlocsA trade bloc can be defined as a preferential trade agreement (PTA) between a subset of countries, designed to significantly reduce or remove trade barriers within member countries. When a trade bloc comprises neighbouring or geographically close countries, it is referred to as a regional trade (or integration) agreement

CharacteristicsIt implies a reduction or elimination of barriers to trade, This trade liberalisation is discriminatory Trade blocs can also entail deeper forms of integration, for instance of international competition, investment, labour and capital markets (including movements of factors of production), monetary policy, etc.


First economic blocs was the German Customs Union (Zollverein) initiated in 1834 First waves of PTAs appeared in the 1930s leading to a fragmentation of the world into trade blocs Surges of trade bloc formation were seen in the 1960s and 1970s, as well as in the 1990s after the collapse of Communism. By 1997, more than 50% of all world commerce was conducted under the auspices of regional trade blocs.

Main Trade blocs in the World

European Free Trade Agreement (EFTA) North American Free Trade Agreement (NAFTA) In Latin America, the Common Market of the South (MERCOSUR) Central American Common Market (CACM) Latin American Integration Association (LAIA) Caribbean Community and Common Market (CARICOM);

Levels of Integration

Depending on the level of economic integration, trade blocs can fall into different categoriesy Free trade agreement y Customs unions y Common market y Economic union

Free Trade AgreementThe removal of barriers of trade between members Trans-shipment problem- when goods are shipped through a third country To avoid this problem, free trade agreements usually contain local content regulations. NAFTA, EFTA, CUSTA, US Israel Free Trade Agreement etc.

Customs UnionsRemoval of trade barriers the same as FTA Higher level of integration by including a common external tariff This does away with the trans-shipment problem since tariff rates are the same across all members of the customs union. Southern African Customs Union (SACU)

Common MarketSame provisions as a customs union Also eliminates barriers to factor movements among its members Labour is now free to migrate between countries in a common market. Common Market of South (MERCOSUR), Central American Common Market (CACM)

Economic UnionAugments the level of integration found in a common market Coordination of economic policy among its members May take the shape of a common currency or restrictions on fiscal policy European Union(EU), Economique et Montaire de lAfrique Occidentale (UEMOA), etc.

Emergence of Trade Blocs

Several Reasons explain the emergence of Trade Blocs:y Import-substitution development at a regional level y To insulate a region from the world economy y To stabilize and foster the economy at a regional level y Concluding a PTA is politically easier than pursuing

multilateral trade liberalization agreements envisaged under the General Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO)


Concessions can be more easily exchanged among a small number of countries PTAs can also entail elements as competition, investments, labour and capital market considerations. Can serve as commitment, signalling and insurance mechanisms in the policy determination of its members Contributing to reducing uncertainty and increasing credibility about political and economic developments

Economic Effects of Trade Blocs

Static Effects- leads to a change in the trade patterns among members as well as with non-member countriesy Trade Creation y Trade Diversion y Welfare Implication

Dynamic Effectsy Market Power

Trade CreationIncreases efficiency in the allocation of resources Arises from the removal of trade barriers between member countries

Trade DiversionLeads to a less efficient allocation of resources Production of the good shifts from the lowest cost producer to a higher cost producer Represent a shift away from comparative advantage

Welfare Implications

Prices fall down Liberalizing trade between a group of countries can lead to trade creation Deadweight loss of having the tariff which now goes to consumers Net Gain to the Society increases While Trade Diversion can potentially reduce welfare As a member switches from a relatively efficient, low cost producer outside the CU to less efficient, higher cost producer

Dynamic EffectsMarket Power- Increase in the size of the market that a firm can sell to. A small country may not have sufficient market demand for a firm to fully capture economies of scale European Union estimate the gains from economies of scale will lead to about a 3% expansion of European production.

NAFTA (North American Trade Agreement)Member Countries- United States, Canada, and Mexico Agreement came into force on January 1, 1994. As of 2007, the largest Trading Bloc in the world In terms of combined purchasing power parity GDP of its members Second largest by nominal GDP comparison


Eliminate barriers to trade in, and facilitate the crossborder movement of, goods and services between the territories of the Parties; Promote conditions of fair competition in the free trade area; Increase substantially investment opportunities in the territories of the Parties; Provide adequate and effective protection and enforcement of intellectual property rights in each Party's territory; Establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance and enhance the benefits of this Agreement.


Spanning 1992 to 2007, agricultural exports grew from the US to Canada and Mexico at 156%. From 1993 to 2007, there was percentage increment of goods exports by 231% to the U.S from Canada and Mexico. In 2006, the export of services from the US to Mexico and Canada increased from $25 billion to $62 billion (125%). The same period witnessed increase in services export reach $37 billion from Canada and Mexico. In 2006, the U.S. foreign direct investment (FDI) increased to $331 billion in Canada and Mexico.

EFTA (European Free Trade Association)Members are- Iceland, Liechtenstein, Norway and Switzerland Founded by the Stockholm Convention in 1960. Founded by the following seven countries: Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the UK Since the beginning of the 1990s EFTA has actively pursued trade relations with third countries in and beyond Europe


The immediate aim of the association was to provide a framework for the liberalisation of trade in goods amongst its Member States The Association is responsible for the management of:y The EFTA Convention, which forms the legal basis of the

organisation and governs free trade relations between the EFTA States; y EFTAs worldwide network of free trade and partnership agreements; y The European Economic Area (EEA) Agreement, which enables three of the four EFTA Member States (Iceland, Liechtenstein and Norway) to participate in the EUs Internal Market.

MERCOSURMercosur or Mercosul (Spanish: Mercado Comn del Sur, Portuguese: Mercado Comum do Sul, English: Southern Common Market) Member Countries- Argentina, Brazil, Uruguay and Paraguay Founded in 1991 by the Treaty of Asuncin To promote free trade and the fluid movement of goods, people, and currency

ObjectivesThe free transit of production goods, services and factors between the member states Fixing of a common external tariff (TEC) and adopting of a common trade policy Coordination of macroeconomic and sectorial policies of member states relating to foreign trade, agriculture, industry, taxes, monetary system, exchange and capital, services, customs, transport and communications

South Asian Association for Regional Cooperation (SAARC)

SAARC is the largest of any regional organization in term of population. It was established on December 8, 1985 Bangladesh, Bhutan, Maldives, Nepal, Pakistan, India and Sri Lanka Afghanistan became its eighth member SAARC provides a platform for the peoples of South Asia to work together in a spirit of friendship, trust and understanding. It aims to promote the welfare of the peoples of South Asia and to improve their quality of life through accelerated economic growth, social progress and cultural development in the region.

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