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Trading blocs

A regional trading bloc is a group of countries within a geographical region


that protect themselves from imports from non-members. Trading blocs are a
form of economic integration, and increasingly shape the pattern of world
trade. There are several types of trading bloc:
Preferential Trade Area
Preferential Trade Areas (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 Area
Free Trade Areas (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 nonmembers. 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. In addition, as well as
removing tariffs, non-tariff barriers are also reduced and eliminated. For a
common market to be successful there must also be a significant level of
harmonisation of micro-economic policies, and common rules regarding
monopoly power and other anti-competitive 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).
See: The EU
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 specialise. 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.
See: Trade creation and trade diversion
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 specialisation 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.
See: Trade creation and trade diversion.

See: EU Sugar Case


Retaliation
The development of one regional trading bloc is likely to stimulate the
development of others. This can lead to trade disputes, such as those
between the EU and NAFTA, including the recent Boeing (US)/Airbus (EU)
dispute. The EU and US have a long history of trade disputes, including the
dispute over US steel tariffs, which were declared illegal by the WTO in 2005.
In addition, there are the so-called beef wars with the US applying 60m
tariffs on EU beef in response to the EUs ban on US beef treated with
hormones; and complaints to the WTO of each others generous agricultural
support.
During the 1970s many former UK colonies formed their own trading blocs in
reaction to the UK joining the European common market.
SAARC Preferential Trading Arrangement (SAPTA)
In December 1991, the Sixth Summit held in Colombo approved the
establishment of an Inter-Governmental Group (IGG) to formulate an
agreement to establish a SAARC Preferential Trading Arrangement (SAPTA) by
1997. Given the consensus within SAARC, the Agreement on SAPTA was
signed on 11 April 1993 and entered into force on 7 December 1995 well in
advance of the date stipulated by the Colombo Summit. The Agreement
reflected the desire of the Member States to promote and sustain mutual
trade and economic cooperation within the SAARC region through the
exchange of concessions.

The basic principles underlying SAPTA are:

overall reciprocity and mutuality of advantages so as to benefit equitably all


Contracting States, taking into account their respective level of economic and
industrial development, the pattern of their external trade, and trade and
tariff policies and systems;
negotiation of tariff reform step by step, improved and extended in
successive stages through periodic reviews;
recognition of the special needs of the Least Developed Contracting States
and agreement on concrete preferential measures in their favour; and
inclusion of all products, manufactures and commodities in their raw, semiprocessed and processed forms.

Four rounds of trade negotiations have been concluded under SAPTA covering
over 5000 commodities. Each Round contributed to an incremental trend in
the product coverage and the deepening of tariff concessions over previous
Rounds.