Regional Trade Blocs

Trade Blocs
 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.
 When a trade bloc comprises neighbouring or
geographically close countries, it is referred to
as a ‘regional trade (or integration)
agreement’
 Characteristics
 It implies a reduction or elimination of barriers
to trade,
 This trade liberalisation is discriminatory
 Trade blocs can also entail deeper forms
of integration, for instance of international
competition, investment, labour and
capital markets (including movements of
factors of production), monetary policy, etc.
 Evolution
 First economic blocs was the German Customs
Union (Zollverein) initiated in 1834
 First waves of PTAs appeared in the 1930s
leading to a fragmentation of the world into
trade blocs
 Surges of trade bloc formation were seen in the
1960s and 1970s, as well as in the 1990s after
the collapse of Communism.
 By 1997, more than 50% of all world commerce
was conducted under the auspices of regional
trade blocs.
Main Trade blocs in the World
 European Free Trade Agreement (EFTA)
 North American Free Trade Agreement
(NAFTA)
 In Latin America, the Common Market of the
South (MERCOSUR)
 Central American Common Market (CACM)
 Latin American Integration Association (LAIA)
 Caribbean Community and Common Market
(CARICOM);
 Levels of Integration
 Depending on the level of economic
integration, trade blocs can fall into different
categories
Free trade agreement
Customs unions
Common market
Economic union
 Free Trade Agreement
 The removal of barriers of trade between
members
 Trans-shipment problem- when goods are
shipped through a third country
 To avoid this problem, free trade agreements
usually contain local content regulations.
 NAFTA, EFTA, CUSTA, US Israel Free
Trade Agreement etc.
 Customs Unions
 Removal of trade barriers the same as FTA
 Higher level of integration by including a
common external tariff
 This does away with the trans-shipment
problem since tariff rates are the same across
all members of the customs union.
 Southern African Customs Union (SACU)
 Common Market
 Same provisions as a customs union
 Also eliminates barriers to factor movements
among its members
 Labour is now free to migrate between
countries in a common market.
 Common Market of South (MERCOSUR),

Central American Common Market (CACM)

 Economic Union
 Augments the level of integration found in a
common market
 Coordination of economic policy among its
members
 May take the shape of a common currency or
restrictions on fiscal policy
 European Union(EU), Economique et Monétaire
de l’Afrique Occidentale (UEMOA), etc.
 Emergence of Trade Blocs
 Several Reasons explain the emergence of Trade
Blocs:
Import-substitution development at a regional level
To insulate a region from the world economy 
To stabilize and foster the economy at a regional level
Concluding a PTA is politically easier than pursuing
multilateral trade liberalization agreements envisaged
under the General Agreement on Tariffs and Trade
(GATT)/World Trade Organization (WTO)
 Contd…
 Concessions can be more easily exchanged among a
small number of countries
 PTAs can also entail elements as competition,
investments, labour and capital market
considerations.
 Can serve as commitment, signalling and insurance
mechanisms in the policy determination of its
members
 Contributing to reducing uncertainty and increasing
credibility about political and economic
developments
 Economic Effects of Trade Blocs
 Static Effects- leads to a change in the trade
patterns among members as well as with
non-member countries
Trade Creation
Trade Diversion
Welfare Implication
 Dynamic Effects
Market Power
 Trade Creation
 Increases efficiency in
the allocation of
resources
 Arises from the removal
of trade barriers between
member countries
 Trade Diversion
 Leads to a less efficient
allocation of resources
 Production of the good
shifts from the lowest cost
producer to a higher cost
producer
 Represent a shift away
from comparative
advantage
 Welfare Implications
 Prices fall down
 Liberalizing trade between a group of countries can
lead to ‘trade creation’
 Deadweight loss of having the tariff which now goes to
consumers
 Net Gain to the Society increases
 While ‘Trade Diversion’ can potentially reduce welfare
 As a member switches from a relatively efficient, low
cost producer outside the CU to less efficient, higher
cost producer
 Dynamic Effects
 Market Power- Increase in the size of the
market that a firm can sell to.
 A small country may not have sufficient
market demand for a firm to fully capture
economies of scale
 European Union estimate the gains from
economies of scale will lead to about a 3%
expansion of European production.
NAFTA (North American Trade
Agreement)
 Member Countries- United States, Canada,
and Mexico
 Agreement came into force on January 1,
1994.
 As of 2007, the largest Trading Bloc in the
world In terms of combined purchasing
power parity GDP of its members
 Second largest by nominal GDP comparison
Objectives
 Eliminate barriers to trade in, and facilitate the cross-border
movement of, goods and services between the territories of
the Parties;
 Promote conditions of fair competition in the free trade area;
 Increase substantially investment opportunities in the
territories of the Parties;
 Provide adequate and effective protection and enforcement
of intellectual property rights in each Party's territory;
 Establish a framework for further trilateral, regional and
multilateral cooperation to expand and enhance and enhance
the benefits of this Agreement.
Achievements
 Spanning 1992 to 2007, agricultural exports grew from
the US to Canada and Mexico at 156%.
 From 1993 to 2007, there was percentage increment of
goods exports by 231% to the U.S from Canada and
Mexico.
 In 2006, the export of services from the US to Mexico
and Canada increased from $25 billion to $62 billion
(125%). The same period witnessed increase in services
export reach $37 billion from Canada and Mexico.
 In 2006, the U.S. foreign direct investment (FDI)
increased to $331 billion in Canada and Mexico.
EFTA (European Free Trade
Association)
 Members are- Iceland, Liechtenstein, Norway
and Switzerland
 Founded by the Stockholm Convention in
1960.
 Founded by the following seven countries:
Austria, Denmark, Norway, Portugal, Sweden,
Switzerland, and the UK
 Since the beginning of the 1990s EFTA has
actively pursued trade relations with third
countries in and beyond Europe
Objectives
 The immediate aim of the association was to provide a
framework for the liberalisation of trade in goods
amongst its Member States
 The Association is responsible for the management of:
The EFTA Convention, which forms the legal basis of the
organisation and governs free trade relations between the EFTA
States;
EFTA’s worldwide network of free trade and partnership
agreements;
The European Economic Area (EEA) Agreement, which enables
three of the four EFTA Member States (Iceland, Liechtenstein
and Norway) to participate in the EU’s Internal Market.
MERCOSUR
 Mercosur or Mercosul (Spanish: Mercado
Común del Sur,  Portuguese: Mercado Comum
do Sul, English: Southern Common Market)
 Member Countries- Argentina, Brazil, Uruguay
and Paraguay
 Founded in 1991 by the Treaty of Asunción
 To promote free trade and the fluid movement of
goods, people, and currency
Objectives
 The free transit of production goods, services and
factors between the member states
 Fixing of a common external tariff (TEC) and
adopting of a common trade policy
 Coordination of macroeconomic and sectorial
policies of member states relating to foreign
trade, agriculture, industry, taxes, monetary
system, exchange and capital, services,
customs, transport and communications
South Asian Association for Regional Cooperation (SAARC)

 SAARC is the largest of any regional organization in term

of population.
 It was established on December 8, 1985
 Bangladesh, Bhutan, Maldives, Nepal, Pakistan, India
and Sri Lanka
 Afghanistan became its eighth member
 SAARC provides a platform for the peoples of South Asia
to work together in a spirit of friendship, trust and
understanding. It aims to promote the welfare of the
peoples of South Asia and to improve their quality of life
through accelerated economic growth, social progress and
cultural development in the region.
Thank You