TRADING BLOCS

DEFINITION
Frankel, Stein, & Wei (1997) define trading blocs

as the groups of nations forming customs union or an economic union Trading blocs are formation of group of countries for mutual benefits. They indicate regional economic integration of countries for mutual benefits.

MEANING
A set of countries which engage in international

trade together, and are usually related through a free trade agreement or other association.

FORMATION
Formation of trade blocs (also called

international economic groupings) at the global level is one important post second world war development in the field of international trade. An evolving trade in international economic activities is the formation of multinational trading blocs.

WHY ARE TRADING BLOCS FORMED?

Trade blocs are made up of a group of

contiguous countries that decide to have common trading policy for the rest of the world in terms of tariffs and market access but have preferential treatment for one another Organization form varies among market regions, but the universal reason for the formation of such groups is to ensure the economic growth and benefit of the participating countries.

TYPES OF TRADING BLOCS

Preferential trade area Free trade area Customs union Common market

 Preferential trade areas (ptas)

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 areas (ftas) 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 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

 For a common market to be successful there

must also be a significant level of harmonization of micro-economic policies, and common rules regarding monopoly power and other anticompetitive 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).

CHARACTERISTICS OF TRADING BLOCS

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 bloc.

OBJECTIVES
To remove or at least to reduce trade barriers

among the member countries. To impose common external tariff and non-tariff barriers on non member countries. To bring integration of economics of member countries. To create common currency and central bank.

 To maintain cordial economic, political, cultural

and social relation among the member of the group. To bargain collectively with the other trading groups. To provide assistance to member countries.

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 specialize. 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 others 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 specialization 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.

MAIN TRADE BLOCS

EU NAFTA ASEAN SAARC OPEC CACM SAFTA

EU (European Union)
The European Union (EU) is a political and economic

community of twenty-seven member states, located primarily in Europe. The EU comprises a single market created by a system of laws which apply in all member states, guaranteeing the freedom of movement of people, goods, services and capital. It maintains a common trade policy, agricultural and fisheries policies, and a regional development policy.

 The EU was established as the European

Economic Community in 1957 by the Treaty of Rome and has undergone many changes since, most notably in 1992 by the Maastricht Treaty. Since 1957 new accessions have raised the number of member states, and powers have expanded. As a result, the EU can be described as both a supranational and an intergovernmental body.

 The economy of the European Union (the largest

in the world) combines the economies of 27 member states and is generating an estimated nominal GDP of US$16.6 trillion in 2007. It accounts for 31% of the world's total economic output.

 Fifteen member states adopted a single

currency, the Euro, managed by the European Central Bank. The EU economy consists of a single market and is represented as a unified entity in the WTO.

SAARC (SOUTH ASIAN ASSOCIATION FOR REGIONAL COOPERATION)

The South Asian Association For Regional

Cooperation (SAARC) is an economic and political organization of eight countries in southern Asia. in terms of population, its sphere of influence is the largest of any regional organization: almost 1.5 billion people, the combined population of its member states. It was established on December 8, 1985 by India, Pakistan, Bangladesh, sir lank, Nepal, Maldives and Bhutan.

In April 2007, at the association's 14th summit, Afghanistan became its eighth member. In 2006 the foreign ministers of the SAARC countries agreed in principle to grant observer status to the us, south Korea and the European union.

ASEAN (ASSOCIATION OF SOUTHEAST ASIAN NATIONS)

The Association Of Southeast Asian Nations

(ASEAN) is a geo-political and economic organization of 10 countries located in southeast Asia, which was formed on august 8, 1967 by Indonesia, Malaysia, the Philippines, Singapore, and Thailand as a display of solidarity against communist expansion in Vietnam and insurgency within their own borders.

Since then the role of the organization has changed drastically, and today Vietnam itself is a member, its aims include the acceleration of economic growth, social progress, cultural development among its members, and the promotion of regional peace. In 2005, the bloc had a combined GDP (Nominal/PPP) of about USD$884 billion/$2.755 trillion growing at an average rate of around 4% per annum.

 Nominal GDP had grown to $1,066.4 billion in

2006. ASEAN MEMBER COUNTRIES Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam

NAFTA (NORTH AMERICAN FREE TRADE AGREEMENT)

The North American Free Trade Agreement

(NAFTA) is the trade bloc in north America created by the north American free trade agreement (NAFTA) and its two supplements, the north American agreement on environmental cooperation (NAAEC) and the north American agreement on labor cooperation (NAALC), whose members are Canada, Mexico and the united states.

 It came into effect on 1 January 1994 and (as of

2008) it remains the largest trade bloc in the world in terms of combined gdp of its members
NAFTA eliminated the majority of tariffs on products

traded among the united states, Canada, and Mexico, gradually phased out other tariffs over a 15-year period.

 Restrictions were to be removed from many

categories, including motor vehicles, computers, textiles, and agriculture. The treaty also protects intellectual property rights (patents, copyrights, and trademarks), and outlines the removal of investment restrictions among the three countries.

 The treaty is trilateral in nature; the terms apply

equally to all countries, in all areas except agriculture, in which stipulations, tariff reduction phase-out periods, and protection of selected industries, were negotiated on a bilateral basis NAFTA member countries CANADA, MEXICO, UNITED STATES OF AMERICA

SOUTH ASIA FREE TRADE AGREEMENT (SAFTA)

The agreement on the south Asian free trade

area is an agreement reached at the 12th south Asian association for regional cooperation (SAARC) summit at Islamabad, capital of Pakistan on 6 January 2004. It creates a framework for the creation of a free trade zone covering 1.4 billion people in India, Pakistan, Nepal, Srilanka, Bangladesh, Bhutan and the Maldives.

 The seven foreign ministers of the region signed

a framework agreement on SAFTA with zero customs duty on the trade of practically all products in the region by end 2012.

CACM (CENTRAL AMERICAN COMMON MARKET)

The Central American Common Market

(CACM) ), is an economic trade organization between five nations of central America. established 1960 between the nations of Guatemala, el Salvador, Honduras and Nicaragua in a conference in Managua. Costa Rica joined the CACM in 1963.

 The organization collapsed in 1969 with the

football war between Honduras and el Salvador, but was then reinstated in 1991.

 The CACM has succeeded in removing duties on

most products moving among the member countries, and has largely unified external tariffs and increased trade within the member nations. However, it has not achieved the further goals of greater economic and political unification that were hoped for at the organization's founding.

OPEC(ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES )

OPEC is the organization of the petroleum

exporting countries. its mission is to secure a return to oil investors and an economic supply of oil to consumers. The Organization Of Petroleum Exporting Countries (OPEC) is a cartel of twelve countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

 The organization has maintained its

headquarters in Vienna since 1 September 1965, and hosts regular meetings among the oil ministers of its member countries. Indonesia's membership from OPEC was voluntarily suspended recently as it became a net importer of oil.

CONCLUSION
Thus, Trading Blocs are to remove the trade

barriers among the countries so that the export and import becomes easy. Due to different trade blocs countries trade with each other and get benefits.