Trade Blocs

Sunday, January 27, 2013

Meaning of Trade Blocs 
Trade Blocs are regional groupings of countries to promote free trade among the member countries without any kind of restrictions (such as tariff and quota). 

Advantages of forming a Trade Bloc
  1. It removes trade barriers 
  2. It provides each member with an extended market 
  3. It promotes friendship and cooperation 
  4. It reduces the prices of imports from member countries 
  5. It assists economic development 
  6. It fastens the mobility of factor resources 
Effects on an economy of being outside a trade bloc
  1. Trade with non-member countries is restricted so that they can not take part in free trade with member countries 
  2. Smaller market limits their scope for specialization and gains from international trade 
  3. Restrictions on non-members reduce the volume of their trade causing unemployment 
  4. Restrictions on international trade with non members breed rivalry and invites retaliation instead of friendship and cooperation
Types of Trade Blocs 

1. Free Trade Area The members of FTA remove trade restrictions (such as tariff and quota) on imports from other member countries. Each country is free to set its own trade barriers in their trade dealings with the rest of the world.
Example; 
  1. EFTA – European Free Trade Association (consisting of Norway, Sweden, Austria, Iceland, Finland and Switzerland) 
  2. NAFTA – North American Free Trade Agreement (consisting of USA, Canada and Mexico.
2. Customs Unions
The member countries of customs unions agree; 
  • to remove all kinds of trade restrictions in their trade among themselves 
  • to impose a Common External Tariff (CET) on imports from countries outside the union 
Example; 
  1. The European Union 
  2. The MERCOSUR of South America which consists of Argentina, Brazil, Paraguay and Uruguay.
3. Common Markets
The members of Common Markets allow free trade and free movement of factors of production (labour and capital) between member countries. 

4. Economic Union 
Economic Unions possess all features of Common Markets. In addition, members of Economic Unions adopt common economic policies on agriculture, transport and taxation. The European Union is a Customs Union moving towards an Economic Union.
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