Economics
Trading Blocs
Trading blocs are groups of countries that form an agreement to reduce barriers to trade among themselves while maintaining barriers for non-member countries. This can lead to increased trade and economic cooperation among member countries, as well as potential trade diversion away from non-member countries. Examples of trading blocs include the European Union and the North American Free Trade Agreement (NAFTA).
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4 Key excerpts on "Trading Blocs"
eBook - PDFJapanese Economy In Retrospect, The: Selected Papers By Gary R Saxonhouse (In 2 Volumes)
Selected Papers by Gary R Saxonhouse(In 2 Volumes)
- Robert M Stern, Gavin Wright, Hugh Patrick(Authors)
- 2010(Publication Date)
- World Scientific(Publisher)
It is possible that the benefits for members of a trading bloc through trade creation may be less than the costs imposed on nonmembers through trade diversion (Viner 1950). Indeed, shifts in the terms of trade in favor of members at the expense Pricing Strategies and Trading Blocs 963 91 Pricing Strategies and Trading Blocs in East Asia of nonmembers are responsible for many of the benefits that follow the organi-zation of a trading bloc. This can happen even if a trading bloc leaves its pro-tective barriers against nonmembers unchanged. Of course, matters can get worse. A newly formed bloc may succumb to temptation and attempt to exploit its newfound market power by raising its barriers against nonmembers and still further improving its terms of trade. Even without assuming such GATT-inconsistent behavior, provided not all countries belong to Trading Blocs, trad-ing blocs may be able, not just to improve member welfare, but to push it beyond what might be expected with global free trade. By way of illustration consider a world with N countries of equal size (see Krugman 1991). Each country is specialized in the production of a single good that is an imperfect substitute for the products of all other countries. These countries are not only equal in size; they also have identical preferences and produce their goods with the same technology. Each country imposes identical tariffs on the imports of all other countries, except trading bloc member coun-tries impose no tariffs on the products of fellow members. While Krugman puts each of his symmetric countries in one of a number of equal-sized Trading Blocs and assumes that each country produces the same number of units of its single good, here it will be assumed that the global economy is divided up between members and nonmembers of a single bloc and that each country's production of its single good is variable.
- Bart Kerremans, Bob Switky(Authors)
- 2018(Publication Date)
- Taylor & Francis(Publisher)
Finally, another distinction can be made between advanced industrial countries and developing countries. 14 Explanations for the Emergence of Trade Blocs at Higher Levels of Analysis Classical Trade Theory and Customs Union Theory The literature on trade blocs is, for the most part, quite recent. Classical economics, Marxist analyses, and even the interdependence literature virtually ignored the subject. The classical, liberal economic approach, for example, assumed that in a world capitalist system, economic relations will result in a division of labor that integrates all countries on a global scale. If there is a breakdown of an open trading system, the prediction is for a rise in protectionist, beggar-thy-neighbor policies. The possibility of various states banding together to ease the deleterious effects of a closing world economy had – until recently – received little attention. The choice was between an open system based on multilateralism or a closed (or closing) system based only on bilateralism. More promising economic work on regionalized trade has been based on Customs Union Theory which posits that when a customs union is formed, trade is both created and diverted. Internally, potential member states expect the combination of economies of scale and lowered trade barriers facilitate trade. Within such a regional trading arrangement, countries also achieve gains to trade through the reciprocal exchange of concessions on trade barriers and greater market access. Externally, the privileges to states within the union are not shared with those on the outside giving a de facto advantage to union members (Viner, 1961). Two recent examples of trade diversion involves NAFTA discrimination against the EU firms. First, European telecommunications equipment exporters face Mexican tariffs of 15-20% compared with tariffs of less than 5% within NAFTA
eBook - ePub- Penelope Hartland-thunberg(Author)
- 2019(Publication Date)
- Routledge(Publisher)
The only other Trading Blocs that have approached achieving total free trade in their internal exchanges are the Central American Common Market (CACM) and the Caribbean Common Market (CARICOM); trade in nearly all the goods that are exchanged among the members is duty free. The other blocs have done little other than exchange preferences for a few products. The ineffectiveness of most Trading Blocs among developing countries is traceable to great differences in the economic structure of members, to their having established no agreed schedule of intra-bloc duty reductions, and/or to political disputes and jealousies among members. Originally both CACM and the East African Common Market (EACM), for example, contained much promise for successful regional integration, but as a result of mounting political controversy among members in the late 1960s, each began to disintegrate. Today intra-block trade is smaller than before the formation of EACM. The intra-bloc share of CACM trade has declined since the "soccer war" of 1969 after which Honduras and El Salvador refused to trade with one another. For other members, it is still an effective organization, although the recent upheaval in Nicaragua puts its future in doubt.Table I (page 6) shows the share of world trade accounted for by each trading bloc in 1976. In the aggregate, these blocs represented more than half of world trade, but excluding the European blocs they accounted for only 11 percent of world trade. Annex tables A-1 show the slow growth of intra-bloc trade in relation to total exports for each trading bloc.The successful accomplishment of the basic goal of Trading Blocs, the stimulation of intra-bloc trade through the reduction of tariff levies among members, is perhaps the most significant indication of their effectiveness. Looking at the LDC Trading Blocs in the aggregate, the relative importance of their intra-bloc exports to their total exports rose from 7 percent in 1965 to 12 percent in 1975. In largest part, however, this increase is accounted for by the importance of petroleum in the intra-bloc trade of the two oil-producing blocs, ASEAN and LAFTA. Omitting these two from the totals, intra-bloc trade as a share of the total remained roughly constant between 1965 and 1975. (The data show an increase from 5 percent to 7 percent. See Notes to Annex III
eBook - PDF- Antoni Estevadeordal, Kati Suominen, Robert Teh(Authors)
- 2009(Publication Date)
- Cambridge University Press(Publisher)
When nations’ production structures differ in a richer way, formations of blocs can make the blocs’ output-mix more similar and this will reduce each bloc’s market power. For example, if there are four nations, two labour-poor and two labour-rich, the formation of two blocs with one nation of each type would produce a world where blocs had equal factor endowments. In a Heckscher–Ohlin world, such a shift would extinguish the market between the two blocs and with it the incentive to charge a tariff. Of course, that is not the only possibility, but it shows that the monotonic link between bloc size and optional tariffs can be broken. Sinclair and Vines (1995) undertake a more thorough study of the bloc-size-tariff issue, examining, for instance, the case of FTAs as well as customs unions. They make the intuitive point that increasing the size of an FTA does not have a first-order impact on each FTA member’s market power and so the tendency for higher tariffs is absent. The idea that trade costs (i.e. frictional trade barriers) would affect the comparison between regionalism and multilateralism is obvious and was pointed out by Krugman (1991a) in a simple extension of his basic model. He assumes that there are continents as well as countries – where continents are defined as groups of nations that have low trade costs among themselves but high trade costs with other continents. If the inter-continental trade costs are high enough, continental free trade comes very close to approximating global first trade (since the remaining tariffs fall on very little trade). In the extreme of infinite inter- continental trade costs, the first-best outcome can be obtained with continental trade blocs. The basic point that ‘natural trade blocs’ can liberalize most of the world’s trade had strong resonance with the real-world pattern of RTAs. It also attracted a large number of papers that elaborated on Krugman’s basic insight by considering more general sets of trade costs.
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