Trading blocs

What is a trading bloc?

A Trading bloc is a group of countries grouping together to promote trade within the group. Apart from promoting trade, the member countries of certain trading blocs may also have political objectives.

Types of trading blocs

Free Trade Areas
In free trade areas, there are no barriers to trade. Customs duties or tariffs are wived between member countries. For example, Australia has formed free trade agreements with Singapore, USA and Thailand. North American Free Trade Area covers USA, Canada and Mexico.

Customs Union
There is free trade between member countries of a customs union. However an external tariff is imposed on goods from outside the union. The oldest customs union in the world is South African Customs Union, which has South Africa, Lesotho, Namibia, Botswana and Swaziland as its member states.

Single Market/Common Market
In addition to having the principles of customs union, a Single Market allows free movement of capital and labour within the bloc.It also allows for the relaxation of trade regulations such as documents and trade standards between the member countries.

Economic and Monetary Union
In addition to having all the characteristics of a single market, an Economic and Monetary Union also uses a common currency used by the member countries.

Examples of trading blocs

ASEAN – the Association of Southeast Asian Nations
Member countries are Singapore, Malaysia, Indonesia, Brunei, Thailand, the Philippines, Vietnam, Cambodia, Laos and Myanmar.

EU – European Union
Current members are France, Germany, Italy, Belgium, the Netherlands, Luxembourg, Britain, Denmark, the Irish Republic, Spain, Portugal, Austria, Sweden, Finland, Slovenia, Lithuania, Malta, Poland, Slovakia, Cyprus, Estonia, Hungary and Latvia, Romania and Bulgaria.

CARICOM – the Caribbean Community
Full Member countries are Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Trinidad and Tobago, Jamaica and Suriname.

SAARC – South Asian Association for Regional Cooperation
Member Countries are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. Even though it is not a Free Trade Area yet, there are trade pacts between individual countries India with Maldives and Nepal.

PARTA – Pacific Regional Trade Agreement – Pacific Islads Forum
Members are 14 Pacific islands, Australia and New Zealand. The purpose is to improve social and economic well being of the people of the South Pacific region.

SADC – South African Development Community.
SADC achieved a Free Trade Agreement between member countries in 2008. Current members are Angola, Botswana, Lesotho, Malawi, Mozambique, Namibia, Swaziland, Tanzania, Zambia, Zimbabwe, South Africa, the Democratic Republic of Congo, Madagascar and Mauritius.

Advantages and disadvantages of joining a trading bloc

Advantages of joining a trade bloc

  • It is a general encouragement of trade
  • Free Trade between member states means there is access to larger markets within the member countries
  • Since there are no trade restrictions such as tariffs, quotas and embargoes, businesses have to be efficient in order to be able to compete. And thus prices are competitive.
  • Since goods can move freely with the member states, it allows a wider choice of goods for consumers.
  • Expanded markets means businesses can increase sales and thus achieving economies of scale.
  • If the trading bloc makes it possible for businesses to set up factories and outlets in different countries, they will be able to take advantage of cheap land, skilled labour and raw materials wherever they are available.
  • Free movement of labour from one country to another means people enjoy greater freedom and opportunity to seek the work that fits best for them.
  • Understanding and relations between neighbours who are members of the same bloc can be improved.
  • Possibility of single currency rids the problem of exchange rate barriers and makes payments for goods and services easier.

Disadvantages of joining a trade bloc

  • Sometimes countries are reluctant to join a trade bloc for the fear of losing the national identity.
  • Firms will no longer enjoy protection such as subsidies and grants from their own government.
  • If the firms of a particular country is generally unable to compete with firms from other parts of the bloc, that country could suffer since its firms could go out of business.
  • Countries may become over-regulated with too many rules and regulations.
  • Annual contribution made to the bloc by the government could be too large compared to the benefit the membership of the bloc could bring.
  • Goods imported from outside the bloc to a country could become expensive due to external tariff imposed on the import of those goods.