What Is A Trade Bloc
A trade bloc is one of the arrangements made by several countries to protect their economies from competition from other countries. It can be defined as an agreement between various international governments or intergovernmental regional organizations in which barriers of regional governments on international trade are minimized or abolished between the state participating in it. This agreement allows the participating states to trade easily with each other as much as possible. The information provided in this write-up can help you to know 'what is a trade bloc' more precisely.
Though a trade bloc allows the member states to trade freely with each other but they cannot trade with the countries that are not member rot this agreement. In this way, a trade bloc can significantly affect the concept of global trading. It can deprive exporters of new trading opportunities and countries from importing products from other countries at competitive rates.
Types of trading blocs
Various types of trade blocs have been designed to control global economies like:
The participant countries agree to eliminate or minimize barriers to trade with each other and for trading with non-members they establish common quotas and tariffs.
The trade barriers like quotas and tariffs are abolished or reduced y the member countries while trading with each other. But while trading with non-members they establish their own quotas and tariffs.
Member countries agree on establishing common policies on various economic aspects including interest rate, common currency as well as taxation.
It is a kind of customs union which allows its members to reduce barriers to the sale of goods as well as reduce restriction on the movement of production factors like finance and manpower.
Some of the global trade blocs
North Atlantic Free Trade Association or NAFTA:
It is a free trade area between Mexico, Canada, and the US.
European Union or EU:
It is the most incorporated trading block in which 27 European countries are the common part of a customs union to have common regulations and free trade between them.
South Asia Free Trade Area or SAFTA:
It includes countries around the Indian subcontinent like Bangladesh, Afghanistan, India, Bhutan, Pakistan, Maldives, Sri Lanka, and Nepal.
Free Trade Area in South East Asia or ASEAN:
It was established in 1992 between the countries Indonesia, Brunei, Philippines, Malaysia, Thailand, Singapore, Laos, Vietnam, Cambodia, and Myanmar.
This customs union was created by 55 countries of the African continent to build closer economic and political ties with a view to become a free trade area.
This southern American trading block was established in 1991 which includes Brazil, Argentina, Uruguay, and Paraguay as its full members and Chile, Bolivia, Ecuador, and Colombia as its associate members. Ecuador. It became a customs union from a free trade area.
Advantages of trade blocs
Create trade opportunities by removing tariff:
It offers great opportunities for exporters and reduces prices for consumers
Increase specialization by increasing trade:
It increases output and lowers the average cost for the benefit of economies.
Improve the efficiency of the market:
The removal of tariffs and increased competition can work as a price floor that increases consumption due to a reduction in prices. It improves the efficiency of the market by reducing the loss of burden.
Increase foreign direct investment:
By creating trade blocs foreign direct investment increases. It can be beneficial for the economies of the participating countries by expanding business and job opportunities.
Trade blocs can reduce the cost of imports by eliminating tariffs which allow consumers to buy imported goods instead of local production and save money to spend somewhere else. It can also reduce the cost of production of local items using imported components due to their reduced prices.
Disadvantages of trading blocks
Loss of trade benefits:
Trade blocs cannot get the benefits of free trade between different countries.
Deformation of trade:
The beneficial effects of competitive trade and specialization cannot be availed by trade blocs as they can deform world trade opportunities. These blocs will protect inefficient producers from efficient producers who are not members of the bloc. It will divert away trade from the efficient producers out of the trading area.
The development of various trading blocs can be initiated after the development of one bloc which can increase disputes between different trading blocs. The dispute between NAFTA and the EU is one of the examples of trade revenge between trade blocs.