INTERNATIONALBUSINESS MANAGEMENT

BUS 4012

INTERNATIONAL TRADE BLOCS

a. What is a trading bloc?

There are a variety of ways in which countries can “protect” their domestic economies from

competition from abroad. One of them is through trading blocs.

A trading bloc is a type of intergovernmental agreement, often part of a regional

intergovernmental organisation, where regional barriers to international trade, (tariffs and non-

tariff barriers) are reduced or eliminated among the participating states, allowing them to trade

with each other as easily as possible.

The idea is that member countries freely trade with each other, but establish barriers to trade with

non-members, which has had a significant impact on the pattern of global trade.

International trade agreements can open up new opportunities for exporters. They can also ensure

access to competitively priced imports from other countries.

While the formation of trade blocs, such as the European Union and NAFTA (North American

Free Trade Agreement), has led to trade creation between members, by the same token it is also

harder for countries outside the bloc to trade, leading to what is called trade diversion, where a

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company that otherwise might have got the business in that country is prevented from doing so

because of a trading bloc and the barriers in place for non-member countries.

b. The Role and Importance of Trading Blocs

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 utilisation 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.

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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. This results into increase in income level of the people, which enhances 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 utilised for

creating employment opportunities.

5. Benefit to the consumers:

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.

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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 establish firms but also to the newly emerging firm.

8. Development of region:

Trading bloc plays an important role in contributing the development, industrialisation 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.

c. Types of trading blocs

i. Free Trade Area

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Members agree to reduce or abolish trade barriers such as tariffs and quotas between themselves.

They maintain their own individual tariffs and quotas with respect to non-members.

ii. Customs Union

Countries that belong to customs unions agree to reduce or abolish trade barriers between

themselves and agree to establish common tariffs and quotas with respect to outsiders.

iii. Common Market

This is a customs union in which the members also agree to reduce restrictions on the movement

of factors of production – such as people and finance – as well as reducing barriers on the sale of

goods.

iv. Economic Union

A common market which is taken further by agreeing to establish common economic policies on

such things as taxation and interest rates and, even, a common currency.

d. Major Regional Trading Blocs in the World.

i. ASEAN – Association of South East Asian Nations

ASEAN was established on 8th August 1967 in Bangkok, Thailand. There are 10 member

countries of ASEAN including Brunei, Malaysia, Singapore, Vietnam, Indonesia, Laos,

Cambodia, Thailand, Philippines and Myanmar. The main goals of ASEAN are to increase

economic growth, social progress and promote regional space and stability. It aims to transform

ASEAN into a single entity. Singapore is the biggest trading market of ASEAN countries. As per

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the trade map, ASEAN exports of goods to the global market worth USD 890 billion and imports

worth USD 846 billion in the year 2017. However, the exports were USD 1183 billion and

imports were USD 1105 billion during 2016.

ii. APEC – Asia Pacific Economic Cooperation

APEC also referred to member economies and accounting approximately 60% of the world’s

GDP. It is responsible for facilitating economic growth, cooperation, trade and investment in this

region. APEC consists of 21 member countries including Brunei Darussalam, Canada, Chile,

China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Papua New

Guinea, Peru, Philippines, Russia, Singapore, Taipei, Thailand, United States and Vietnam.

APEC exports of goods stood at USD 8021 billion and imports stood at USD 7997 billion during

the year 2016. China and United States are the biggest trading countries.

iii. BRICS

BRICS is an association of five national economies such as Brazil, Russia, India, China and

South Africa. However, South Africa has joined this group in the year 2010 and earlier it was

known as BRIC. The total exports of BRICS amounted to USD 2902 billion and imports

amounted to USD 2339 billion during 2017. China is the largest trading country in terms of both

imports and exports among these countries and recorded 70% of BRICS exports and 65% of

BRICS imports.

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 iv. EU – European Union

European Union is the most integrated trade block in the world and formed in the year 1951. It

has built a single Europe-wide market and also launched Euro as a single currency for regional

trading. European Union goods exports to the global market worth USD 5887 billion and imports

worth USD 5785 billion during the year 2017.

EU consists of 28 member countries which are Austria, Belgium, Bulgaria, Denmark, Finland,

Germany, France, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Romania, Spain,

Sweden, United Kingdom, Cyprus, Croatia, Czech Republic, Estonia, Hungary, Latvia,

Lithuania, Malta, Poland, Slovakia and Slovenia. European Union comprises five EU institutions

namely European Parliament, Council of the EU, European Commission, Court of Justice and

Court of Auditors.

v. NAFTA – North America Free Trade Agreement

NAFTA was established on 1st January 1994 and comprises three giant member countries which

are Canada, United States and Mexico. USA and Canada provide highly industrialized

environment for manufacturing & services growth while Mexico provides cheaper resources.

NAFTA is responsible to eliminate trade barriers among its member countries, promote a free

trade environment and to increase investment opportunities.

NAFTA goods exports stood at USD 2376 billion and imports stood at USD 3262 billion during

the year 2017. United States is the largest trading country among NAFTA countries.

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 vi. CIS – Commonwealth of Independent States

CIS group was founded in the year 1991 and it is a group of 12 member countries including

Azerbaijan, Armenia, Russia, Ukraine, Kazakhstan, Belarus, Turkmenistan, Uzbekistan,

Georgia, Moldova, Kyrgyzstan and Tajikistan. According to CIS countries trade data, the

contribution of CIS nations in the world’s exports was 2.6% in 2016, which declined from

2015’s 3%. And in world’s imports, countries of CIS region contributed 2% in both the years.

vii. COMESA – Common Market for Eastern and Southern Africa

COMESA exists as an organization of independent sovereign states that have agreed to

cooperate in developing the regional or global trade. It is an economic union of southern and

eastern African countries. It consists of 19 member countries such as Burundi, Comoros, DR

Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius,

Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. COMESA exports

recorded USD 65.93 billion and imports recorded USD 142.29 billion during the year 2016.

Egypt is the largest trader among COMESA countries.

viii. SAARC – South Asian Association for Regional Cooperation

SAARC provides a platform for the people of South Asian countries to work together in a spirit

of trust and understanding. It was founded on 8th December 1985 and its member states include

Afghanistan, Bangladesh, Bhutan, India, Nepal, Maldives, Pakistan and Sri Lanka. SAARC

exports of goods to the world worth USD 330 billion and imports worth USD 481 billion in the

year 2016. India is the biggest trading country in both imports and exports among SAARC

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members. SAARC organize summits annually and the country hosting the summit holds the

chair of the association.

ix. MERCOSUR

MERCOSUR stands for Mercado Comun del Cono Sur which means Southern Common Market

and it was established on 26th March 1991. It is tariff union of South American countries

covering the market of Brazil, Argentina, Venezuela, Paraguay and Uruguay. Its associate

members include Bolivia, Chile, Colombia, Ecuador and Peru. Its main goals are to accelerate

sustained economic development.

MERCOSUR is one of the fastest growing trading blocks in the world. Spanish and Portuguese

are the major languages spoken in this region. MERCOSUR global exports worth USD 292

billion and imports worth USD 237 billion during the year 2017.

x. IOR-ARC – Indian Ocean Rim Association for Regional Cooperation

IOR-ARC comprises 21 member countries such as Australia, Bangladesh, Comoros, India,

Indonesia, Iran, Kenya, Madagascar, Malaysia, Mauritius, Mozambique, Oman, Seychelles,

Somalia, Singapore, South Africa, Sri Lanka, Tanzania, Thailand, UAE and Yemen. Initially

IOR ARC consisted of 7 countries only but it has expanded to include other countries as well. It

aims to promote sustainable growth and development of its members. IOR-ARC exports worth

USD 1875 billion and imports worth USD 1847 billion during 2016.