2. Trade blocs operation and structure
Definition of trade blocs
A set of countries which engage in international trade together, and are usually related through
a free trade agreement or other association.
The Role and Importance of Trading Blocs are as follows:
Trading blocs have played a positive role in the development of international trade. This can be
explained with the help of following points:
1. Economic integration:
Trading blocs have resulted in economic integration. It represents various forms of economic
integration in a region like SAARC, OPEC, ASEAN, EU etc. Trading blocs unifies different
independent economies and bring the nations closer. Trading blocs helps in enhancing degree of
regional co-operation and interrelationship. It brings the nation closer by unifying independent
economies and facilitates economic cooperation among the members of the group.
2. Free transfer of resources:
Trading blocs helps in elimination of tariff, and non-tariff barriers and facilitates free transfer of
resources across the border of member countries. This help in optimum utilization of available
resources. This is because no country in the world is self-sufficient and they need to depend upon
one another for the fulfillment of their requirement.
3. Increase in Trade:
Free transfer of resources helps in increasing the productivity of member nations. They eliminate
trade barriers and encourage free trade. This increase import and export activities of member
nations, which results into increase in trade revenues. Trading blocs are sound and efficient to
create sustainable economic growth. Trading blocs are created to encourage trading partners to
buy and sell goods already made in their home countries. It also encourages economies of scale.
4. Employment opportunities:
Large-scale production and distribution leads to an increase in employment opportunities directly
and indirectly. These results into increase in income level of the people, which enhance the
standard of living of the economy. Trading blocs tend to increase in income and employment
level of the member countries. Capital is required to generate more and more employment
opportunities. Trading blocs lead to free transfer of resources viz natural, human and capital
resources, which are optimally utilized for creating employment opportunities.
5. Benefit to the consumers:
3. Formation of trading blocs enables transfer of technologies across borders resulting into
improvement in productivity and quality of goods and services ultimately benefiting the
consumers to a greater extent.
Removal of trade barriers and free transfer of resources have resulted into mass production and
distribution. This facilitates provision of quality product in competitive prices to the consumers.
6. Cooperative spirit:
Trading blocs leads to economic, political and cultural integration of member -countries. This
develops a spirit of cooperation and coordination among member nations. This helps in
maintaining good relations among the member nations.
7. Competition:
Trading blocs has resulted into increase in competition between companies of entire region. It
also facilitates to face competition effectively. Trading blocs’ gives competitive advantage not
only to large establishes firms but also to the newly emerging firm.
8. Development of region:
Trading bloc plays an important role in contributing the development, industrialization and
economic growth of whole region. Trading blocs are a sound and efficient way to create
sustainable economic growth. Liberal policies and removal of trade barriers has resulted in the
growth of industries in those regions. This in turn increased the production and distribution
activities leading to economic growth of those regions.
Types of trading bloc:
Preferential Trade Area:
Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to
reduce or eliminate tariff barriers on selected goods imported from other members of the area.
This is often the first small step towards the creation of a trading bloc.
Free Trade Area
Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or
eliminate barriers to trade on all goods coming from other members.
Customs Union
4. A customs union involves the removal of tariff barriers between members, plus the acceptance of
a common (unified) external tariff against non-members. This means that members may
negotiate as a single bloc with 3rd parties, such as with other trading blocs, or with the WTO.
Common Market
A ‘common market’ is the first significant step towards full economic integration, and occurs
when member countries trade freely in all economic resources – not just tangible goods. This
means that all barriers to trade in goods, services, capital, and labour are removed. In addition, as
well as removing tariffs, non-tariff barriers are also reduced and eliminated. For a common
market to be successful there must also be a significant level of harmonization of micro-economic
policies, and common rules regarding monopoly power and other anti-competitive
practices. There may also be common policies affecting key industries, such as the Common
Agricultural Policy (CAP) and Common Fisheries Policy (CFP) of the European Single Market
(ESM).
Advantages for members of trading blocs
Free trade within the bloc
Knowing that they have free access to each other's markets, members are encouraged to
specialize. 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.
5. 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.
Disadvantages of trading blocs
Loss of benefits
The benefits of free trade between countries in different blocs are lost.
Distortion of trade
Trading blocs are likely to distort world trade, and reduce the beneficial effects of specialization
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 is the so-called beef war switch 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.
The European Union (EU)
The EU is the world’s largest trading bloc, and second largest economy, after the USA. The EU
was originally called the Economic Community (Common Market, or The Six) after its
6. formation following the Treaty of Rome in 1957. The original six members were Germany,
France, Italy, Belgium, Netherlands, and Luxembourg.
The initial aim was to create a single market for goods, services, capital, and labour by
eliminating barriers to trade and promoting free trade between members. In terms of dealing with
non-members, common tariff barriers were erected against cheap imports, such as those from
Japan, whose goods prices were artificially low because of the undervalued yen.
By 2014, following continuous enlargement, the EU had 28 members. Latvia is the latest country
to join, in European Union
European Union members
AUSTRIA BELGIUM
BULGARIA CROATIA
CYPRUS CZECH REPUBLIC
DENMARK ESTONIA
FINLAND FRANCE
GERMANY GREECE
HUNGARY IRELAND
ITALY LATVIA
LITHUANIA LUXEMBOURG
7. PORTUGAL
ROMANIA
SLOVAKIA
SLOVENIA
SPAIN
SWEDEN
UNITED KINGDOM
MALTA
European Union
The European Union (EU) is a politico-economic union of 28member states that are primarily
located in Europe the EU operates through a system of supranational independent institutions
and intergovernmental negotiated decisions by the member states. Institutions of the EU include
the European Commission, the Council of the European Union, the European Council, the Court
of Justice of the European Union, the European Central Bank, the Court of Auditors, and the
European Parliament. The European Parliament is elected every five years by EU citizens.
The EU traces its origins from the European Coal and Steel Community (ECSC) and the
European Economic Community (EEC), formed by the Inner Six countries in 1951 and 1958,
respectively. In the intervening years, the community and its successors have grown in size by
the accession of new member states and in power by the addition of policy areas to its remit. The
Maastricht Treaty established the European Union under its current name in 1993. The latest
major amendment to the constitutional basis of the EU, the Treaty of Lisbon, came into
force in 2009.
The EU has developed a single market through a standardized system of laws that apply in all
member states. Within the Schengen Area, passport controls have been abolished policies aim to
ensure the free movement of people, goods, services, and capital enact legislation in justice and
home affairs, and maintain common policies on trade agriculture, fisheries, and regional
development.
The monetary union was established in 1999 and came into full force in 2002. It is currently
composed of 18 member states that use the euro as their legal tender. Through the Common
Foreign and Security Policy, the EU has developed a role in external relations and defence. The
union maintains permanent diplomatic missions throughout the world and represents itself at the
United Nations, the WTO, the G8, and the G-20.
With a combined population of over 500 million inhabitants or 7.3% of the world population, the
EU in 2012 generated a nominal gross domestic product (GDP) of 16.584 trillion US dollars,
constituting approximately 23% of global nominal GDP and 20% when measured in terms of
purchasing power parity, which is the largest economy by nominal GDP and the second largest
economy by GDP (PPP) in the world. In2012, the EU was awarded the Nobel Peace Prize
NAFTA
8. The United States has linked with Canada and Mexico to form a free trade zone, the North
American Free Trade Agreement (NAFTA).
It launched in1988 by us and Canada after which Mexico joined in1994
The NAFTA agreement covers environmental and labour issues as well as trade and
investment, but US unions and environmental groups argue that the safeguards are too weak.
In terms of combined purchasing power parity GDP of its members, as of 2007 the trade bloc
is the largest in the world and second largest by nominal GDP comparison
Main members of NAFTA: Canada; Mexico; United States
SAARC
The South Asian Association for Regional Cooperation (SAARC) is an economic
and geopolitical organization of eight countries that are primarily located in South Asia. The
SAARC Secretariat is based in Kathmandu, Nepal.
The idea of regional political and economic cooperation in South Asia was first raised in 1980
and the first summit was held in Dhaka on 8 December 1985, when the organization was
established by the governments of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri
Lanka.[12][13] Since then the organization has expanded by accepting one new full
member, Afghanistan,[14]and several observer members.
The SAARC policies aim to promote welfare economics, collective self-reliance among the
countries of South Asia, and to accelerate socio-cultural development in the region. The SAARC
has developed external relations by establishing permanent diplomatic relations with the EU,
the UN (as an observer), and other multilateral entities. The official meetings of the leaders of
each nation are held annually whilst the foreign ministers meet twice annually. The 18th SAARC
Summit is scheduled to be held in Kathmandu in November 2014
BRICS
BRICS is the acronym for an association of five major emerging national economies: Brazil,
Russia, India, China, and South Africa.[2] The grouping was originally known as "BRIC"
before the inclusion of South Africa in 2010. The BRICS members are all developing countries,
but they are distinguished by their large, fast-growing economies and significant influence on
regional and global affairs; all five are G-20 members
As of 2014, the five BRICS countries represent almost 3 billion people which are 40% of the
world population, with a combined nominal GDP of US$16.039 trillion (20% world GDP) and
an estimated US$4 trillion in combined foreign reserves. As of 2014, the BRICS nations
represented 18 percent of the world economy.
9. Brazil held the chair of the BRICS group in 2014, having hosted the group's sixth summit in
2014.
The BRICS have received both praise and criticism from numerous quarters. The term,
"BRICS", was coined by economist Jim in his publication, Building Better Global Economic
BRICs.
Bank
The key development of the BRICS summit was the launch the long-awaited New Development
Bank and a Currency Reserve Pool. With combined resources of $200 billion, they are aimed at
fostering greater financial and development cooperation among the five emerging markets.
With a stated capital of $100 billion, the bank - widely seen as an alternative to the World Bank
and the International Monetary Fund – "will become one of the largest multilateral financial
development institutions in the world," Putin said. The group has also launched a Currency
Reserve Pool, which Putin said "creates the prerequisites for effectively protecting our countries
from financial market crises."
"I am confident that closer economic and financial cooperation between BRICS countries will
allow us to implement truly large-scale joint programs with the aims of securely developing our
nations," Putin said. BRICS is "acquiring a new quality," he said.
The NDB is to be headquartered in Shanghai, China. Its first president will come from India, its
inaugural chairman of the board of directors will be from Brazil and the inaugural chairman of
the board of governors will be Russian.
BRICS states account for more than 40% of the world's population and 21% of global GDP,
Putin said. In the past ten years, the GDP of countries with developed economies grew by 60%,
while that of the BRICS states increased four-fold