Let’s understand what is Trade Blocs and its implications on business. Trade blocs are also known as Trade blocks or Economic Integration scheme or Regional Integration Agreement or Regional Integration Arrangement (RIA) or Regional Trade Agreement (RTA).
Origin of Trade Blocs
The origin of Trade Blocs is in an economic integration scheme and considered as a building block of economic development of the member countries.
International business is significantly impacted by the scheme of the economic integration of different nations.
There has been a rapid increase in trade blocs or RTAs since the 1990’s.
Definition
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.
Concept of Trade Blocs
This concept of trade blocs is designed to achieve various economic, social, and political purposes.
Total No. Of RTAs till May 2003: 265 notified to GATT/WTO and only 180 in force then
Many countries belong to more than one RTA’s: for e.g. Mexico was a part of 13 FTA’s in 2003
More than half of world trade occurs within actual or prospective trading blocs. More than 30% of world trade already takes place within the existing RIA’s.
Motivations to form trade blocs
- To obtaining economic benefits from achieving a more efficient production structure by exploiting economies of scale
- To strengthen political ties and managing migration flows for non-political benefits
- To increase security for smaller countries by forming trade blocs with larger countries.
- To improve members bargaining strength in multilateral trade negotiations
- To ensure growth and survival of infant industries by protecting the regional market.
Characteristics of Integration Schemes (Trade Blocs)
Free Trade Area
Free Trade among Members
1. Custom Unions
Free Trade among Members + common External Commercial Policy
2. Common Market
Free Trade among Members + common External Commercial Policy+Free Factor Mobility within the market
3. Economic union
Free Trade among Members + common External Commercial Policy+Free Factor Mobility within the market+Harmonised economic policies
4. Economic Integration
Free Trade among Members + common External Commercial Policy+Free Factor Mobility within the market+Harmonised economic policies+Supernational organisational structure
List & Examples
- The European Union (EU)
- The North American Free Trade Agreement (NAFTA)
- The European Free Trade Agreement (EFTA)
- The European Agreements and the European Economic Area (EEA)
- The Canada-US Free Trade Agreement (CUSTA)
- US Israel Free Trade Agreement
- The Common Market of the South (MERCOSUR)
- The Central American Common Market (CACM)
- The Andean Pact
- The Latin American Integration Association (LAIA)
- The Caribbean Community and Common Market (CARICOM)
- Communauté Economique de Afrique Occidentale (CEAO)
- Union Economique et Monétaire de l’Afrique Occidentale (UEMOA)
- Union Douanière et Economique d’Afrique Centrale (UDEAC)
- The Common Market of Eastern and Southern Africa (COMESA)
- Preferential Trade Area for Eastern and Southern African States (PTA),
- The Southern African Customs Union (SACU)
- The Association of Southeast Nations (ASEAN)
- The ASEAN Free Trade Area (AFTA)
- The Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA).
Trade Blocs Details
1. European Union (EU)
Also known as the European Economic Community (EEC), European Common Market (ECM), or the European Community
EU originally comprised of 6 nations on January 1, 1958
- Belgium
- France
- Federal Republic of Germany
- Italy
- Luxemburg
- The Netherlands
2. NAFTA
The North American Free Trade Agreement, in 1988, signed between US and Canada, then Mexico in 1994.
Now 15 members
NAFTA is a very important free trade area made up of developed and developing countries.
Purpose
To eliminate all tariffs on products moving among the three countries
To end other barriers to services and investment capital within north America
NAFTA covers the following areas:
a. Market access
b. Trade rules
c. Services
d. Investment
e. Intellectual property
f. Dispute settlement
NAFTA has achieved substantial trade liberalisation.
Reference Books
Sanoussi Bilal, “Trade blocs”, in R. Jones ed., Routledge Encyclopedia of International Political Economy, Routledge, forthcoming (2001)
Francis Cherunilam, International Business, 4th Edition, Eastern Economy Edition, PHI
V K Bhalla and S Shiva Ramu, International Business Environment and Management, 12th Revised and Enlarged Edition, Anmol Publications Pvt Ltd.