A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where barriers to trade (tariffs and others) are reduced or eliminated among the participating states.
Trade blocs can be stand-alone agreements between several states (such as the North American Free Trade Agreement) or part of a regional organization (such as the European Union). Depending on the level of economic integration, trade blocs can be classified as preferential trading areas, free-trade areas, customs unions, common markets, or economic and monetary unions.
Lists of trade blocs
Historic trading blocs include the Hanseatic League, a Northern European economic alliance between the 12th and 17th centuries, and the German Customs Union, formed on the basis of the German Confederation and subsequently the German Empire from 1871. Surges of trade bloc formation occurred in the 1960s and 1970s, as well as in the 1990s after the collapse of Communism. By 1997, more than 50% of all world commerce was conducted within regional trade blocs. Economist Jeffrey J. Schott of the Peterson Institute for International Economics notes that members of successful trade blocs usually share four common traits: similar levels of per capita GNP, geographic proximity, similar or compatible trading regimes, and political commitment to regional organization.
Many advocates of global free trade are opposed to trading blocs. Trade blocs are seen by them to encourage regional free trade at the expense of global free trade. Those who advocate for it claim that global free trade is in the interest of every country, as it would create more opportunities to turn local resources into goods and services that are both currently in demand and will be in demand in the future by consumers. However, scholars and economists continue to debate whether regional trade blocs fragment the global economy or encourage the extension of the existing global multilateral trading system.
A single market is a type of trade bloc in which most trade barriers (for goods) have been removed
Advantages and disadvantages
- Competition: Trade blocs force the manufacturers in participating countries to compete with each other. Increased competition creates pressures for greater efficiency within firms, which results in lower prices for consumers. Home producers have to work with greater efficiency to ensure survival of their goods against the low price imported goods since tariffs are removed. Overseas producers tend to increase their production of goods as they realize that the low price goods that they produce have a better chance of competing with home-produced goods in the market.
- Economies of scale: The larger markets created by trade blocs permit companies to take advantage of economies of scale. Since the average cost of each good produced tends to fall as production increases, this results in lower prices for consumers.
- Improved Market Efficiency: Increased competition and the removal of tariffs, which may act as a price floor, drive down prices and allow for increased consumption. This reduces deadweight loss and hence improves market efficiency.
- Increased foreign direct investment: An increase in foreign direct investment may result from the creation of trade blocs. This can benefit the economies of participating nations by creating jobs in new or expanded businesses.
- Trade Effects: Trade blocs eliminate tariffs, which drives down the cost of imports. As a result, consumers can save money by buying imported goods when cheaper than locally produced ones—they can then spend those savings on other goods. Reducing the cost of imports also reduces the cost of locally produced goods that use imported parts or components.
- Concessions: No country wants to let foreign firms gain domestic market share at the expense of local companies without getting something in return. Any country that wants to join a trading bloc must be prepared to make concessions. For example, in trading blocs that involve developed and developing countries, such as bilateral agreements between the U.S. or the EU and relatively poor Asian, Latin American or African countries, the latter may have to allow multinational corporations to enter their home markets, hurting the business of some local firms.
- Interdependence: Because trading blocs increase trade among participating countries, those countries become increasingly dependent on each other. A disruption of trade within a trading bloc as a result of a natural disaster, conflict or revolution may have severe consequences for the economies of all participating countries.
- Loss of Sovereignty: A trading bloc, particularly when it is coupled with a political goal, is likely to lead to at least partial loss of sovereignty for its participants. For example, the European Union, started as a trading bloc in 1957 by the Treaty of Rome, has transformed itself into a far-reaching political organization that deals not only with trade matters, but also with human rights, consumer protection, greenhouse gas emissions and other issues which are only marginally related.
- Regionalism vs. Multinationalism: Trading blocs inherently favor their participating countries. For example, among NAFTA partners, the United States, Canada and Mexico, trade has risen to more than 80 percent of Mexican and Canadian trade and more than a third of U.S. trade, according to a 2009 report by the Council on Foreign Relations. However, regional economies establish tariffs and quotas that protect intra-regional trade from outside forces, according to the University of California Atlas of Global Inequality. Rather than pursuing a global trading regime within the World Trade Organization, which includes the majority of the world's countries, regional trade bloc countries contribute to regionalism rather than global integration.
|Trade bloc||Population||Gross domestic product (USD)||Members|
|Economic and monetary unions|
|Customs and monetary unions|
|Preferential trade areas and Free trade areas|
Comparison between regional trade blocs
|Regional bloc||Free Trade Area||Economic and monetary union||Free Travel||Political pact||Defence pact||Other|
|Customs Union||Single Market||Currency Union||Visa-free||Border-less|
|EU||in force||in force7||in force2||in force 1||in force||in force
(Schengen 1, 7, NPU and CTA 1)
|in force||in force
(NATO 1, 7 and CFSP/ESDP 1)
|ESA 1, 7|
|EFTA||in force||in force2, 7||in force||in force 1, 7||in force 1, 7||ESA 1, 7|
|CARICOM||in force||in force||in force 1||in force 1 and
|in force 1||proposed||proposed||NWFZ|
|AU||ECOWAS||in force 1, 3||in force 1||proposed||in force 1 and
proposed for 2012 1 and
|in force 1||proposed||proposed||in force||NWFZ1|
|ECCAS||in force1||in force1||proposed||in force1||in force||in force||NWFZ1|
|EAC||in force||in force||proposed for 2020s||proposed for 2024||proposed||?||proposed for 2023||NWFZ1|
|SADC||in force1||in force1||proposed for 2015||de facto in force 1 and proposed common for 2016||proposed||NWFZ1|
|COMESA||in force1||proposed for 2010||?||proposed for 2018||NWFZ1|
|Common||in force1||proposed for 2019||proposed for 2023||proposed for 2028||proposed for 2028||NWFZ1|
|Pacific Alliance||in force||in force||NWFZ|
|USAN||MERCOSUR||in force||in force||proposed for 2015||in force||proposed for 2014||NWFZ|
|CAN||in force||in force 1||proposed1||in force||NWFZ|
|Common||proposed for 2014 4||proposed for not after 2019||proposed for 2019||proposed for 2019||in force||proposed for 2019||proposed||in force||NWFZ|
|EEU||in force||in force1||in force||Proposed||in force||in force 1|
|AL||GCC||in force||in force||proposed||proposed 1||in force||in force|
|Common||in force1||proposed for 2015||proposed for 2020||proposed||proposed|
|ASEAN||in force 5||proposed for 2015||proposed 8||in force||proposed for 2015||proposed for 2020||NWFZ|
|CAIS||in force1||proposed||?||in force1||in force1||proposed||NWFZ|
|NAFTA||in force||in force 1, 7|
|SAARC||in force 1, 6||proposed||proposed||in force9|
|PIF||proposed for 20211||NWFZ1|
1 not all members participating yet
2 involving goods, services, telecommunications, transport (full liberalisation of railways from 2012), energy (full liberalisation from 2007)
3 telecommunications, transport and energy - proposed
4 sensitive goods to be covered from 2019
5 least developed members to join from 2012
6 least developed members to join from 2017
7 Additionally some non member states also participate (the European Union, EFTA and NATO have overlapping membership and various common initiatives regarding the European integration).
8 Additionally some non member states also participate (ASEAN Plus Three)
9 Limited to "entitled persons" and duration of one year.
Does Economic Integration Cause Foreign Direct Investment?
Massimo Motta and George Norman
Vol. 37, No. 4 (Nov., 1996), pp. 757-783
Published by: Wiley for the Economics Department of the University of Pennsylvania and Institute of Social and Economic Research, Osaka University
- Mansfield and Milner 2005, 333.
- Milner 2002, 450.
- Schott 1991, 2.
- O'Loughlin and Anselin 1996, 136.
- Lal, Deepak (1993). "Trade Blocs and Multilateral Free Trade". Journal of Common Market Studies. 31 (3): 349–358. doi:10.1111/j.1468-5965.1993.tb00468.x.
- Milner 2002, 458.
- Mansfield and Milner 2005, 330.
- http://publications.gc.ca/collections/Collection-R/LoPBdP/inbrief/prb0249-e.htm. Missing or empty
- "WT/COMTD/N/11". wto.org. Archived from the original on 2009-03-25.
- "WT/COMTD/N/21". wto.org. Archived from the original on 2009-03-27.
- "Prensa Latina". Prensa Latina. February 3, 2007. Archived from the original on September 27, 2007.
- "WT/REG238/M/1". wto.org. Archived from the original on 2009-03-04.
- "Definidos critérios para o Parlamento do Mercosul". Senado Federal – Notícias. February 3, 2007.
- Twelfth Andean Presidential Council Act of Lima Archived 2010-07-07 at the Wayback Machine
- "?". CNN. February 3, 2007.
- "Russia, Kazakhstan, Belarus form Eurasian Economic Union". Washington Post. May 29, 2014. Retrieved June 1, 2014.
- http://www.itar-tass.com/eng/level2.html?NewsID=2847543&PageNum=0 Archived September 30, 2007, at the Wayback Machine
- "GCC customs union fully operational". The Peninsula. 2016-08-13. Archived from the original on 18 January 2015. Retrieved 11 January 2015.
- Yemen Proposes Replacing Arab League With Arab Union, Agence France-Presse, 11 February 2004
- "Asean Trade Mins Meet To Speed Up Plans For Single Market". Malaysia Dual Lingual Business News. February 3, 2007. Archived from the original on 2007-09-28.
- "Envisioning a single Asian currency". International Herald Tribune. February 3, 2007.
- "ASEAN To Sign Accord On Visa-Free Travel". AHN – All Headline News. February 3, 2007. Archived from the original on 2007-09-26.
- "ASEAN Leaders Sign Five Agreements at the 12th ASEAN Summit, Cebu, the Philippines, 13 January 2007" (Press release). ASEAN Secretariat. 2007-01-13. Archived from the original on 2012-03-16. Retrieved 2007-01-28.
On the first day of the 12th ASEAN Summit, five Agreements have been signed by ASEAN leaders – reinforcing their commitment in the continuing integration of ASEAN and enhancing political, economic and social cooperation in the region.
- "ASEAN defense ministers aim for security community". ABS-CBN. February 3, 2007. Archived from the original on June 27, 2006.
- Mansfield, Edward D. and Helen V. Milner, "The New Wave of Regionalism" in Diehl, Paul F. (2005). The Politics of Global Governance: International Organizations in an Interdependent World. Boulder: Lynne Rienner Publishers. ISBN 978-1-55587-654-8.
- Milner, Helen V., "International Trade" in Carlsnaes, Walter; Thomas Risse; Beth A. Simmons (2002). Handbook of International Relations. London: SAGE Publications. ISBN 978-0-7619-6304-2.
- O'Loughlin, John; Luc Anselin (1996). "Geo-Economic Competition and Trade Bloc Formation: United States, German, and Japanese Exports, 1968-1992". Economic Geography. 72 (2): 131–160. doi:10.2307/144263. JSTOR 144263.
- Schott, Jeffrey J. (1991). "Trading blocs and the world trading system". World Economy. 14 (1): 1–17. doi:10.1111/j.1467-9701.1991.tb00748.x.