Trading Bloc

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. It is a group of countries within a geographical region that protect themselves from imports from non-members. A group of countries who have joined together to promote trade. This might be through relaxing protectionist barriers or even having a common currency.

Examples of trading blocs include :

EU-European Union), NAFTA -North American Free Trade Agreement), ASEAN-Association of Southeast Asian Nations, EEA – The European Economic Area, CEFTA -The Central European Free Trade Agreement.

Types of trade 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: Countries that belong to customs unions agree to reduce or abolish trade barriers between themselves and agree to establish common tariffs and quotas with respect to outsiders.

Common Market: This is a customs union in which the members also agree to reduce restrictions on the movement of factors of production – such as people and finance – as well as reducing barriers on the sale of goods

Advantages of Trade Bloc
• Firms can enjoy economies of scale, in a trading bloc, firms can produce goods and services with a lower average cost because trading blocs allows firm to have large scale of production
• Trading blocs brings firms closer to each other and create greater competition, consumers will be benefited with better quality of goods and services in a lower price, they will have more choices
• Firms within the bloc can enjoy a tariff free environment
• Countries within the trading bloc can have more international bargaining power

Disadvantages of Trade Bloc
• unfair against countries out of the Trading Blocs –
• Groups not within the Blocs have to pay Tariffs in order to transfer goods
• Countries within the Blocs have to pay higher price to buy goods input from countries out of the Blocs
• May take over local producers
• Workers are often exploited by global companies and paid low wages for long hours

 

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