REGIONAL TRADE Unit-1

BLOCS
 TRADING BLOCS

Definition- Regional trade blocs are intergovernmental associations that manage &
promote trade activities for specific regions of the world.
Is a group of countries within a geographical region that protect themselves from
imports from non-members.
An agreement between states, regions, or countries,
to reduce barriers to trade between the participating regions.
TRADING BLOCS
Chances of a bloc surviving increase- if the members have similar levels of per
capita GNP
geographic proximity
similar or compatible trading & political regimes
Underdeveloped or developing economies will have arrangements that are modelled
to import substitution & regional development
Industrialized or transition economy will have an outward policy aimed more at
boosting rather than controlling global trade
WHY DO COUNTRIES FORM TRADING BLOCS? ?:

Primary objective - regional integration enables countries to take advantage of

geographical proximity as well as the enlarged market formed after such mergers.
- to integrate their economies. The growth in the number of these blocs is a major
development of recent years & a significant fraction of global trade is done through
them.
Trade blocs compliment global trade
Protect intra regional trade form outside forces
Establish regional security
WHY DO COUNTRIES FORM TRADING
BLOCS? ?:

The European Union (EU) created an economy larger than the United States & hence
its bargaining power in global trade has increased.
The Southern African Developmental Coordination Conference formed in 1980 to
abolish apartheid from the region - to reduce economic dependence on South Africa
by increasing trade among them.
WHY DO COUNTRIES FORM TRADING BLOCS? ?:
ECONOMIC GAIN -A MOTIVATION

The Organization of Petrol Exporting Countries ( OPEC; Iran , Iraq, Kuwait,

Saudi Arabia & Venezuela ) is a trade agreement, but it's neither regional nor
aims to increase trade between its signatories. It aims to coordinate a
restriction in oil export volumes so that it has bargaining power & maximum
profit is insured for its members
The Caribbean Community & Common Market ( CARICOM; Barbados,
Jamaica, Trinidad & Tobago…15 members ) — the alliance of tiny islands in
the Caribbean — also doesn't aim to achieve regional integration These
islands are not only sharing the expense of international negotiations but the
solidarity has also enabled them to make the world hear their voice.
WHAT ARE THE POLITICAL IMPLICATIONS OF
TBS? :

Increased trade & interlocking has reduced the risks of war as the cost
become higher for both countries. It ensures that a change in government in
a member state does not result in policy reversal Example , France &
Germany fought 3 wars in 70 yrs. , but in the present situation the trade
arrangements have made it virtually impossible for them to wage a war
against each other

MERCOSUR has reduced tensions between Brazil & Argentina . Association

of Southeast Asian Nations has played pacifier between Indonesia &
Malaysia.
AS A BUILDING BLOCK

External factors include securing markets and providing export opportunities for
domestic companies by dismantling the trade barriers between participating
countries
With the expansion of production, nation-states participating in the FTA are allowing
themselves to increase their exporting, thus creating stronger home markets.
Many nation-states feel compelled to join a FTA for fear of not being included or
being at a comparative disadvantage with other nation-state that are members of a
FTA. This cycle in itself is creating the environmental push towards regionalization.
BUILDING BLOC

Internal factors pressing nation-states towards regional trade bloc membership are positive
indicators in economic growth through increased efficiency from competition.
The lack of competition can allow companies to become lethargic or anti-competitive,
which can slow the growth of an economy. Since the 1970’s, policymaker’s have come to
recognize the benefits of liberalization of foreign trade and investment, deregulation and the
removal of domestic regulations have facilitated high economic growth in the developing
countries of East Asia, as well as industrial nations such as the US and the UK .
The efficiency of markets pushes many nation-states to form or join regional trade
agreements. The regional cooperation provides new options for economic expansion of
domestic products. The market based economy will wean out the weaker companies and
elevate the efficient companies. FTA’s have allowed many nations-states to liberalize their
foreign trade and investment
BUILDING BLOC
Regional trade agreements reach their full potential when the political and ideological
differences among participating countries are minimal.
Trade deals work best when member states coordinate monetary and fiscal policies. In
fact, uncoordinated fiscal policies in the European Union framework are responsible for
current financial turmoil in the region, with a negative impact on trade.  
Bottom-up approaches, in which companies develop supply chains across borders, are
more effective in facilitating regional integration than are top-down approaches imposed
by governments.  Agreements on trade and investment norms—including reducing
transportation costs through coordinated efforts to improve the quality of infrastructure
—can significantly boost intra-regional trade.
Pursuing stronger regional trade agreements can help form the building blocks for global
free trade deals. Increasing trade will not only help middle income economies develop
but also drive growth around the world as the financial crisis recedes.
WHY ARE TBS UNDESIRABLE??? :

Import quotas (limiting the amount of imports into the country so that
domestic consumers buy products made by their countries in their region).
Custom delays (establishing bureaucratic formalities that slow down trade
from the other region)
Subsidies barrier (giving heavy subsidies to protect regional trade )
Voluntary boycotts & technical barriers .
TRADE BLOCKS AS
STUMBLING BLOCS TO
LIBERALIZATION OF TRADE
With the Doha Round of multilateral trade talks stalled, regional trade agreements
(RTAs) offer an alternative approach to increase trade, spur stronger economic
growth, and lower unemployment rates in participating countries.
If multilateralism is not achievable, then minilateralism, based mostly on geography,
might well provide an acceptable alternative.
…CONTD.
Loss of benefits : The benefits of free trade between countries in different blocs is lost.
Distortion of trade: Trading blocs are likely to distort world trade, and reduce the beneficial effects of
specialisation and the exploitation of comparative advantage.
Inefficiencies and trade diversion: Inefficient 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
from developing countries. Trade diversion arises when trade is diverted away from efficient producers who are
based outside the trading area.
Retaliation: The 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 recent Boeing (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. In addition, there are the so-called beef wars with the US
applying £60m tariffs on EU beef in response to the EU’s ban on US beef treated with hormones; and
complaints to the WTO of each other’s generous agricultural support.
During the 1970s many former UK colonies formed their own trading blocs in reaction to the UK joining the
European common market.
…CONTD.
Trade creation effect: Lower barriers create trade, and gains from trade
Trade diversion effect: Lower barriers with some (not all) countries may tilt (divert) trade toward high
cost producers (loss from trade)
Size: large countries impose sanctions on small countries Small country can be heavily trade dependent
(low elasticity)
Relative costs: low to large country, high on small country. Large country retains trade with other non-
sanction countries
Scope: sanctions on more goods puts larger cost on small country
Friends: more effective when large country enlists others to cooperate, less effective if target maintains
trade with others
Timing: extreme, sudden sanctions more effective; more time allows more time to adjust
Politics: dictatorship may retain power even when economic costs may be high
ADVANTAGES
Free trade within the bloc: Knowing that they have free access to each other's markets, members
are encouraged to specialise. This means that, at the regional level, there is a wider application of the
principle of comparative advantage.
Market access and trade creation: Easier 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 by lower 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.
Economies of scale: Producers can benefit from the application of scale economies, which will lead
to lower costs and lower prices for consumers.
Jobs :Jobs may be created as a consequence of increased trade between member economies.
Protection: Firms inside the bloc are protected from cheaper imports from outside, such as the
protection of the EU shoe industry from cheap imports from China and Vietnam.