Chapter 70- Trading Blocs Flashcards
Trading blocs can be created in number of different forms:
- Preferential trading area (PTA)
- Free trade area (FTA)
- Customs union
- Common market
- Single market
- Economic union
Preferential trading area (PTA)
A type of trading bloc where certain types of products from participating countries receive a reduced tariff rate. Beginning of economic integration and a PTA may become a free trade area over time. E.g. the Association of Southeast Asian Nations (ASEAN) has a PTA with China.
Free trade area (FTA)
A region where member states remove all trade barriers between themselves, but each member state nevertheless keeps different barriers against non-member states.
E.g. the North American Free Trade Agreement. In order to protect the region, countries may use a system of allocating certificates known as rules of origin, whereby a defined amount of product or service must be certified as being created within that region. Free trade agreements may also impose additional qualifying rules.
Customs union
A union where member states remove all trade barriers between themselves and members adopt a common set of barriers against non-members.
This means that when a product is shipped from outside the union to any of the member states, only one set of rules regarding customs duties and rules of origin will apply + the product can then be moved freely throughout the countries within the union. E.g. CARICOM ‘Caribbean Community’ which includes 15 nations and colonies.
Common market
Market where goods, labour and capital can move freely across the member states; tariffs are generally removed and non-tariff barriers eliminated, or at least reduced.
Workers can relocate from one country to another without restriction. The integration means that the members must work together on economic and political policies that affect the market. E.g. ASEAN and the Southern Common Market (Mercosur) in South America.
Single market
A market where almost all trade barriers between members have been removed and common laws or policies aim to make the movement of goods and services, labour and capital between countries as easy as the movement within each country.
Borders, standards and taxes are harmonised as much as possible, so not to interfere with commerce between members. E.g. the EU.
Economic union
A type of trade bloc involving both customs union and a common market. Aim is normally closer economic, political and cultural ties between member states. Economic and monetary union- an economic union that uses a common currency. E.g. the EU
Factors to consider in trading blocs:
• Where to produce (cheapest neighbouring country)
• Where to sell (one big market for their goods and services
however can be threats and opportunities)
• How to enter a market (market entry strategy may be adapted
according to opportunities presented by free trade areas or
common market)
• Business strategy (business may not have been able to export to
neighbouring country because of existence of trade barriers, but
one barriers are gone, they will be able to do so.
Impacts on business of trading blocs : Opportunities/Benefits:
- Freeing regional trade may allow individual members to specialise in line with their country’s comparative advantages
- Market should increase. Since trading blocs often do more than reduce tariffs – they also often improve capital flows, streamline regulation and improve competition – they may actually improve the market for non-members as well, even if not by as much as for members.
- Volume of trade increases = economies of scale, which means lower costs for them and consumers. This leads to lower costs for them and usually lower prices for consumers.
- Resources may be easier to source and labour easier to recruit, while production and transport costs may continue to fall.
- As trade increases, may result in greater competition and more efficient market.
- RTA may give power to negotiate for better deals in global market and protect industries against predatory competitors from more economically powerful regions. Moreover, being part of an RTA may give regions the power to negotiate for better deals in the global market. Thus for large, well-placed firms, trade blocs offer new potential markets as well as the prospect of higher efficiency and productivity through larger factories, lower overheads, and faster and possibly less costly logistics.
Drawbacks:
- Could harm overall trade as countries outside region may better placed to specialise or develop a competitive advantage in a product or service, yet they are closed out of the market = may cause trade diversion rather than creation.
- Inefficient producers may be protected from competition, thereby diverting trade away from more efficient producers and potentially harming consumers.
- Overall benefits may be small if an agreement limits the goods/services of trade.
- Locally, some of the benefits may be distributed unequally causing political and social tensions within the region.
- Globally, the benefits may lead to tensions with other regions, leading to retaliation, harming global trade.
- Members of RTAs have differing levels of economic power, causing long term economic and political power imbalance = potential conflict.
- Smaller organisations, opening up competition and the large market may result in more competitors.
The European Union and the single market
•The European Union is a political and economic union of 28-member states that are located primarily in Europe. It has a population of 500 million
Over time the EU has evolved from being a simple trade bloc into a multi-governmental organisation with its own currency (the Euro) and some shared political legislation
-Member states are eligible for EU structural funds to help develop their economies, while agricultural producers in the region all benefit from farm subsidies issued under the common Agricultural Policy
By removing barriers to intra-community trade, markets for firms grow. For instance, when ten new nations joined the EU in 2004, UK first Tesco gained access to 75 million extra customers
An enlarged market increases demand, raising the volume of production and thereby lowering manufacturing costs per unit
The EU also agrees common external tariffs and quotas for foreign imports – in 2006, the EU blocked imports of underwear from Chinese manufacturers on the basis that the annual quota had been exceeded, jeopardising sales of EU clothing makers
•HOWEVER, not all European countries belong to the union, or have the same currency as well as each country being culturally distinct having different languages, customs, religions and integration does not appear to be happening.
NAFTA
• 1994, Canada, Mexico and US in a free trade zone
• Agreement covers trade and investment, labour, financial dealings
and intellectual property + environmental issues.
• Lowered prices for agriculture products.
ASEAN
- ASEAN (the Association of South East Asian Nations) has 10-member states and a combined population of 600 million
- Established in 1967, ASEAN founding members include Singapore, Indonesia, Malaysia and the Philippines
- Over time, they have worked to eliminate tariffs in favour of free trade
- The enlarged ASEAN market has helped Indonesia’s manufacturing industries to thrive
- ASEAN is expected to develop further into a single market called the ASEAN Economic Community (AEC)
- The ASEAN agreement also promotes peace and stability: its member states have pledged not to have nuclear weapons
- As a common market it promotes the free flow of goods and services, investment, labour and capital:
Areas of co-operation include:
Macro-economic and financial policy
Labour policies, including education and professional
qualifications
Infrastructure and communications
E-commerce
Regional sourcing
