A trade bloc is an intergovernmental agreement that brings together a group of countries with the purpose of obtaining mutual economic benefits in international trade. Benefits subsequently result from the reduction or removal of trade tariffs and barriers within member countries. Although most trading blocs are currently immersed in regional integration processes and institutions, there are also nonregional relationships, which tend to be bilateral as well as interregional.
In the 1930s, a wave of regionalism led to the formation of trade blocs in response to the detrimental effects of the Great Depression and the disintegration of the gold standard on the world economy. Another wave of trade bloc formation took place during the 1950s and 1960s with developing countries adopting industrialization strategies based on import substitution. Trade blocs permitted these countries to pursue self-sufficiency by creating regional economies of scale. Also during this period, European countries established the European Coal and Steel Community in 1951 and the European Economic Community in 1957. More recently, since the 1990s, there has been a surge of regional integration initiatives that prioritized market deregulation and privatization of state-controlled sectors; this aligns with the prevailing ideological imperatives of neoliberal globalization.
Different Forms Of Trade Blocs
Trade blocs take many forms, depending on the degree of incremental integration among the participating countries.
Free Trade Zone Or Free Trade Area
A group of countries that agree to set tariff preferences for trade with one another, covering most of their traded goods and services, constitute a free trade zone or area. Member countries retain sovereignty over the determination of their respective trade policies vis-à-vis nonmember countries. Trade disputes and restrictions, which often occur between members, are resolved in dispute resolution mechanisms to which members have previously subscribed in the trade agreement. Local content laws are introduced these areas to prevent nonmember countries from initially exporting to a member country with a low external tariff, with the goal being to send the exports on to a member country that has a higher external tariff. Local content provisions require that a certain percentage of the value of the product must be sourced locally within the free trade area not to be subject to import duties.
Some of the more well-known free trade areas include the recently created ASEAN-China, North American Free Trade Agreement (NAFTA), Economic Community of West African States, and others. A U.S.-proposed Free Trade Area of the Americas (FTAA) was never created due to stiff opposition from governments and broad sectors of the Southern Common Market (MERCOSUR) countries—Argentina, Brazil, Paraguay, and Uruguay.
In addition to a liberalized intrabloc trade, a customs union adopts a common external tariff structure to act as a common trade barrier toward nonmembers. Restrictions apply to the type of tariff protection that this kind of trade bloc can have. According to the principle of nondiscriminatory trade policies under Article 24 of the General Agreement on Tariffs and Trade (GATT), the level of common external tariff can be no higher than an average of previously existing tariffs of the member countries; otherwise, the group must offer compensation to adversely affected nonmember countries.
The Association of Southeast Asian Nations (ASEAN) exemplifies a currently functional customs union. Other examples include the Southern African Customs Union, MERCOSUR, Arab Customs Union, Andean Community, Caribbean Community, Economic and Monetary Community of Central Africa, the Gulf Cooperation Council (GCC), among others.
In addition to the requirements of custom unions, common markets also include the free movement of factors of production: labor and capital. The 1957 Treaty of Rome that created the European Economic Community ultimately aimed to create of a common market—a goal that was substantially achieved by the early 1990s in Western Europe, known as the European Community.
Economic And Monetary Union
An economic and monetary union represents a step higher in the regional integration pathway. The defining feature of economic and monetary unions is the harmonization of tax and currency policies of its members. The most well-known modern case is the Economic and Monetary Union of the European Union with the adoption of the euro as a single currency and a European Central Bank.
Political union represents the ultimate form of economic integration. An example of such a union is the former Soviet Union, though the best-known political union is the United States. The establishment of a European Parliament is a first step on the road toward the formation of a European political union, but whether a full political union will form remains an open question. Likewise, the Union of South American Nations, comprising MERCOSUR and CAN members, is moving toward a constitution of a South American political union encompassing trade, security, and political issues.
Implications For World Trade And Development
The proliferation of trade blocs raised various key issues for scholars. First, there is the question of the relation between trade blocs and the multilateral trade system. The issue centers upon whether trade blocs constitute stumbling blocks or stepping stones to multilateral trade liberalization. Advocates of worldwide free trade generally oppose trading blocs. They believe trade blocs encourage regional trade at the expense of weakening the multilateral trade system. The formation of trade blocs, therefore, sets incentives for other countries to seek membership in order to offset the costs of trade diversion affecting nonmembers. In this sense, trade blocs have been said to trigger a domino effect.
However, supporters see trade blocs as a means to advance the trade liberalization agenda in contexts when multilateral negotiations of trade liberalization from GATT and World Trade Organization are often slow and even stagnated. With a small number of countries, it is easier to exchange concessions and also to agree on effective enforcement mechanisms. Thus, according to this view, even if trade blocs may divert trade flows, they likewise enable trade liberalization to continue moving forward.
A second key issue is the concern about trade blocs contribution to the generation of welfare equitably distributed among the blocs members and economic sectors. This is particularly important in North-South agreements where trade integration involve countries with different levels of socioeconomic development. This problem affects the case of NAFTA, the failed FTAA project, and the Economic Partnership Agreements sponsored by the EU, among others. Critics argue that trade integration accentuates existing asymmetries in levels of development and power if it does not address inequalities through adequate policies and institutions. This applies to market-led models of integration that relegate the social and environmental impacts of trade and investments to lesser importance. Rather than advancing democratic, equitable, and sustainable development, trade blocs can also formalize a regional governance framework to grant citizen rights to transnational corporations, while reducing democratic accountability. South-South initiatives are not exempt from this development challenge. In particular, blocs like MERCOSUR and the proposed trilateral free trade agreement among India, South Africa, and Brazil have the potential both to overcome as well as to reinforce interbloc asymmetries and inequalities.
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