Trading Blocks are pacts between various countries typically having a common geographical area. They form them for protections against non-member nations’ imports. These trading agreements are also a type of economic integration that has more and more impacted the global trade patterns and trends. A few different kinds of trading groups like these exist today.
Preferential Trade Areas are the first and probably most common form. These PTA’s occur when countries of a common geographical area decide to eliminate or at least reduce the tariff barriers that exist on certain goods which they import from other nations in the PTA. This represents the first small but critical step in the development of full scale trading blocks.
The next logical progression in the trading agreements development is to form a Free Trade Area. If two or still more nations within the region concur on eliminating or at least reducing the barriers to all trade on every good imported from the other members, they establish this second step in the chain.
The third step forward is to establish a Customs Union. This means that all trade barriers and tariffs between the group members are canceled, and a unified external tariff policy against non members is placed. It allows the member states to negotiate trading deals with third parties as a single more powerful trading block. They can enter agreements this way with other trading blocks or even the World Trade Organization if they wish.
Full economic integration begins to occur if the members of the trading block continue down the path towards its eventual logical conclusion. This leads them to a common market, the first major leap into economic integration. Member nations are now trading freely in every area of economics and resources, not only physical goods. It entails all services, labor, capital, and goods barriers being eliminated.
They also work to reduce and finally eliminate any non-tariff barriers. The common markets are only truly successful when all micro economic policies and other rules are brought into harmony as well. These include anti-competition laws and anti-monopoly regulations. Some trading blocks at this stage also begin to implement key industry common policies, like the EU’s Common Fisheries Policy and Common Agricultural Policy.
There are numerous advantages to members of a trading block once they are fully formulate and established in practice. Free trade within the block allows member states to specialize in areas of production in which they have the greatest comparative or absolute advantages. Trade increases between key members as they have improved access to one another’s national markets. Trade creation is the inevitable result. It refers to the phenomenon that free trade creates as more expensive domestic producers are outcompeted by more economically efficient and less expensive imports from other trading blocks members.
Lower priced imports also mean a greater consumption effect and higher demand. Economies of scale allow the producers in these nations to benefit and apply the savings to lower pricing for their customers. More jobs are often created because of the higher and growing trade between the block members. Finally, companies within the block may have to be more efficient against their own block rivals, yet they do gain effective economic protection against less expensive imports out of non-block member based corporations. The EU shoe industry is a good example of this. They are economically protected by tariffs on cheaper shoe imports from Vietnam and China.
There are some significant disadvantages of these trading blocks too. Trading blocks usually distort global trade by reducing the benefits of global specialization and comparative advantages of the world as a whole. Those producers which are less efficient than global competitors will be shielded from the outside of block more efficient ones. Trade is diverted away from the most efficient producing companies which are only guilty of being based outside of the trading block area.