RTB Regional trade Block - Types, Advantages and Disadvantages

RTB (REGIONAL TRADE BLOCKS)

Definition: A regional trade block is the result of economic integration of various trading areas of different countries and it is also known as trade blocks, regional trade organizations, and regional groupings. A trade block (regional trade block/regional grouping) is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade (tariffs and non-tariff barriers) are reduced or eliminated among the participating countries.

Characteristics:

            It implies a reduction or elimination of barriers to trade, and

            This trade liberalization is discriminatory, in the sense that it applies only to the member countries of the trade block, outside countries being discriminated against in their trade relations with trade block members.

1 TYPES OF REGIONAL TRADE BLOCKS:

1. Preferential trading agreement:

It is loosest form of economic integration. Under this, a group of countries have a formal agreement to allow each other’s goods and services to be traded on preferential terms.

2. Free trade area:

It is a permanent arrangement between neighboring countries. It involves the complete removal of tariffs on goods traded among the members of the free trade area.

3. Customs union:

Customs union removes barriers to trade in goods and services among themselves.

4. Common market:

It has no barriers to trade among members; in addition, the common market removes restrictions on the movement of factors of production (labor, capital and technology) across borders.

5. Economic union:

This represents full integration of the economics of two or more member countries. In addition to eliminating internal trade barriers, adopting external trade policies and abolishing restrictions on the mobility of the factors of production among members.

6. Political union:

While some degree of political integration often accompanies economic integration, political union implies more formal political links between countries. A limited form of political union may exist where two or more countries share common decision-making bodies and have common policies.

Major regional trade blocks/groups:

1. European union :( EU)

The largest and most comprehensive of the regional economic groups is the European Union. To abolish internal tariffs in order to more closely integrate EU and hopefully allow economic co-operation to help avoid further political conflicts. It includes European Economic Community later it is called as European Community.

2. North American Free Trade Agreement :( NAFTA):

It came into being on January 1, 1994. The most affluent nations of the world I.e., USA and Canada with Mexico – a developing country joined together, to eliminating all tariffs and trade barriers among these countries.

3. South Asian Association for Regional Cooperation (SAARC): December 1985

The successful performance of this trade block is, for economic development of the member countries and in improving the employment opportunities, incomes and living standards of the people of the region gave impetus for the formation of SAARC.

4. SAARC Preferential Trading Arrangement (SAPTA):

The member states realizing the fact that expansion of intra-regional trade could act as a stimulus to the development of their economics, by expanding investment and production, decided to establish and promote regional preferential trading agreement. December 7, 1995.

5. South Asian Free Trade Area (SAFTA):

The SAFTA agreement came into force from January 1, 2006. The agreement promotes mutual trade and economic cooperation among the contracting states, through exchange of concessions in accordance with it. In general, the agreement requires the completion of trade liberalization program.

6. Association of South-East Asian Nations (ASEAN):

A group of six countries, Viz, Singapore, Brunei, Malaysia, Philippines, Thailand and Indonesia, agreed in January 1992 to establish a Common Effective Preferential Tariffs (CEPT). It enables the member countries to have close cohesiveness, share their economic and human resources and synergy in the development of their agricultural sectors, industrial sectors and service sectors. Their strength is well educated and skilled human resources. This strength enabled them to achieve faster industrialization.

         ASEAN Free Trade Area (AFTA):

The major objectives of the AFTA are:

            To encourage inflow of foreign investment into this region,

            To establish free trade area in the member countries,

            To reduce tariff of the products produced in ASEAN countries. AFTA was formed in the year (September 1994).

         Mercosur:

Mercosur, the South American trading block, known as Mercosur is Spanish and Mercosur in Portuguese includes Brazil, Argentina, Paraguay and Uruguay. Two more countries

– Chile and Bolivia – are in the process of joining the trading block. It came into force on January 1, 1995. It has three

Objectives:

            Establishment of a free trade zone,

            A common external tariff (a customs union), and

            Free movement of capital, labor, and services.

         Asia Pacific Economic Cooperation (APEC):

It was formed in 1989 in response to the growing interdependence among the Asia-pacific economics. APEC is a much looser economic grouping but is unique for its members, the huge differences in their economics and stage of development, and for the juxtaposition of almost every system along the political spectrum.

10. European Free Trade Association: (EFTA)

It was formed in 1959. The member countries of EFTA include: Austria, Norway, Portugal, Sweden, and Switzerland. The associate members are Finland and Iceland, Great Britain and Denmark. The EFTA council makes policy decisions of the organization.

11. Latin American Integration Association: (LAIA)

It was formed in 1960. The countries signed the LAIA agreement were Argentina, Brazil, Chile, Mexico, Paraguay, Peru, Uruguay, Colombia, Ecuador, Venezuela, and Bolivia. The council of ministers is assisted by a conference of contracting parties which makes discussions on issues requiring a joint resolution of the members.

12. Economic and Social Commission for Asia and the pacific (ESCAP):

It has 48 member countries and 10 associate members. The ESCAP’s geographical covers as follows:

         East: Cook Islands

           West: Azerbaijan

             North: Mongolia

             South: Australia and New Zealand

            Andean Pact:

It was formed in 1969 includes Bolivia, Chile, Ecuador, Colombia, and Peru. It have had to deal with low economic growth, hyperinflation, high unemployment, political unrest and crushing debt burdens.

14) Central American Common Market and CARRICOM:

It referred to as CARRICOM, it was established in 1973. However, it has repeatedly failed to make any progress towards economic integration. A formal commitment to economic and monetary union was adopted by CARRICOM’s member states in 1984, but since then little progress has been made.

2 ADVANTAGES & DISADVANTAGES OF TRADE BLOCKS:

            Foreign Direct Investment: An increase in foreign direct investment results from trade blocs and benefits the economies of participating nations. Larger markets are created, resulting in lower costs to manufacture products locally.

            Economies of Scale: The larger markets created via trading blocs permit economies of scale. The average cost of production is decreased because mass production is allowed.

            Competition: Trade blocs bring manufacturers in numerous countries closer together, resulting in greater competition. Accordingly, the increased competition promotes greater efficiency within firms.

            Trade Effects Trade blocs eliminate tariffs, thus driving the cost of imports down. As a result, demand changes and consumers make purchases based on the lowest prices, allowing firms with a competitive advantage in production to thrive.

            Market Efficiency: The increased consumption experienced with changes in demand combines with a greater amount of products being manufactured to result in an efficient market. The disadvantages, on the other hand, include: regionalism vs. multinationalism, loss of sovereignty, concessions, and interdependence.

            Regionalism vs. Multinationalism: Trading blocs bear an inherent bias in favor of their participating countries. For example, NAFTA, a free trade agreement between the United States, Canada and Mexico, has contributed to an increased flow of trade among these three countries. Trade among NAFTA partners has risen to more than 80 percent of Mexican and Canadian trade and more than a third of U.S. trade, according to a 2009 report by the Council on Foreign Relations.

                        However, regional economies by establishing tariffs and quotas that protect intra-regional trade from outside forces, according to the University of California Atlas of Global Inequality. Rather than pursuing a global trading regime within the World Trade Organization, which includes the majority of the world's countries, regional trade bloc countries contribute to regionalism rather than global integration.

                        Loss of Sovereignty: A trading bloc, particularly when it is coupled with a political union, is likely to lead to at least partial loss of sovereignty for its participants. For example, the European Union, started as a trading bloc in 1957 by the Treaty of Rome, has transformed itself into a far-reaching political organization that deals not only with trade matters, but also with human rights, consumer protection, greenhouse gas emissions and other issues only marginally related to trade.

                        Concessions: No country wants to let foreign firms gain domestic market share at the expense of local companies without getting something in return. Any country that wants to join a trading bloc must be prepared to make concessions. For example, in trading blocs that involve developed and developing countries, such as bilateral agreements between the U.S. or the EU and relatively poor Asian, Latin American or African countries, the latter may have to allow multinational corporations to enter their home markets, making some local firms uncompetitive.

                        Interdependence: Because trading blocs increase trade among participating countries, the countries become increasingly dependent on each other. A disruption of trade within a trading bloc as a result of a natural disaster, conflict or revolution may have severe consequences for the economies of all participating countries.