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Page 1: Regional Trade Blocs

Regional Trade Blocs

Page 2: Regional Trade Blocs

Trade Blocs A 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’

Page 3: Regional Trade Blocs

Characteristics It 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.

Page 4: Regional Trade Blocs

Evolution 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.

Page 5: 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);

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Levels of Integration Depending on the level of economic

integration, trade blocs can fall into different categoriesFree trade agreement Customs unions Common market Economic union

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Free Trade Agreement The 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.

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Customs Unions Removal 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)

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Common Market Same 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)

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Economic Union Augments 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 Monétaire

de l’Afrique Occidentale (UEMOA), etc.

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Emergence of Trade Blocs Several Reasons explain the emergence of Trade

Blocs:Import-substitution development at a regional levelTo insulate a region from the world economy To stabilize and foster the economy at a regional levelConcluding 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)

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Contd… 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

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Economic Effects of Trade Blocs

Static Effects- leads to a change in the trade patterns among members as well as with non-member countriesTrade CreationTrade DiversionWelfare Implication

Dynamic EffectsMarket Power

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Trade Creation Increases efficiency in

the allocation of resources

Arises from the removal of trade barriers between member countries

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Trade Diversion Leads 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

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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

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Dynamic Effects Market 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.

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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

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Objectives Eliminate barriers to trade in, and facilitate the cross-border

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.

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Achievements 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.

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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

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Objectives 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:The EFTA Convention, which forms the legal basis of the

organisation and governs free trade relations between the EFTA States;

EFTA’s worldwide network of free trade and partnership agreements;

The European Economic Area (EEA) Agreement, which enables three of the four EFTA Member States (Iceland, Liechtenstein and Norway) to participate in the EU’s Internal Market.

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MERCOSUR Mercosur or Mercosul (Spanish: Mercado

Común 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 Asunción To promote free trade and the fluid movement of

goods, people, and currency

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Objectives The 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

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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.

Page 26: Regional Trade Blocs

Thank You


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