What are Regional Trade Blocs (RTBs)?

Regional Trade Blocs or Regional Trade Agreements (or Free Trade Agreements) are a type of
regional intergovernmental arrangement, where the participating countries agree to reduce or
eliminate barriers to trade like tariffs and non-tariff barriers. The RTBs are thus historically
known for promoting trade within a region by reducing or eliminating tariff among the member
countries.

Over the last few decades, international trade liberalisations are taking place in a serious manner
through the formation of RTBs. They are getting wide attention because of many important
international developments. First, now the world is trying hard to escape from the ongoing great
recession phase. Second is the failure of the WTO to take further liberalisation measures on the
trade liberalisation front.

The EU, NAFTA, ASEAN, SAFTA etc are all examples for regional integration. The triad of
North America, Western Europe, and Asia Pacific have the most successful trade blocs. Recently
signed Trans Pacific Partnership is a powerful RTB. Similarly, another one called RCEP is in
negotiation round. India has signed an FTA with the ASEAN in 2009. Simultaneously, the
country has signed many bilateral FTAs

Types of RTBs
 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
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’ (or single 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
harmonisation 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).

The main 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
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.

The main disadvantages of trading blocs

 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.