Essay on Trading Blocs | International Trade | Economic Geography

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Essay on Trading Blocs

Essay Contents:

1. Essay on the Meaning of Trading Blocs
2. Essay on the Advantages of Trading Blocs
3. Essay on the World Trading Blocs

Essay # 1. Meaning of Trading Blocs:

Trading blocs are associations between groups of neighbouring countries for the purpose of promot­ing and freeing trade. There are basically two kinds of associations. Looser Free Trade Associations are concerned only with liberalizing trade by lowering or abolishing tariff barriers within the group and do not interfere with the external trading ties of the individual members.

The tighter type of group­ing, like the EEC (European Economic Community) or Common Market, not only reduces tariffs and other restrictions within the group but at the same time raises tariff barriers against outsiders.

The Common Market also has the long-term aim of in­tegrating the economies of the various member countries so that there is a common policy for agri­culture, industry, labour and so on. Such economic integration may eventually lead to some from of political integration.

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Essay # 2. Advantages of Trading Blocs:

Trading associations have several advantages:

1. Increased Volume of Trade:

The ease of movement within trading blocs as a result of the abolition of trading restrictions promotes trade between member states. This is especially true when tariff barriers are raised against outsiders, as in the Common Market, but even when this is not the case, as in the EFTA (European Free Trade As­sociation), the relative ease of trading with mem­bers rather than with other countries still pro­motes trading links.

The effect of lowering barriers is very great—in the first five years after its forma­tion, trade between members of the Common Mar­ket increased by 50 per cent, and the volume and value of such internal trade has continued to grow.

2. Greater Economic Strength:

By forming a close association which can be regarded as a single unit by other countries and trading or­ganizations, the member nations of trading blocs gain greater economic strength and greater bargain­ing power in world markets.

The Common Market, regarded as a single unit, has a productive capacity and a population almost as great as that of the U.S.A., and as economic and political integration progress its importance as a world economic and political power will increase.

Looser trading as­sociations do not enjoy this advantage to the same extent, but some, such as LAFTA (Latin American Free Trade Association), have been formed partly to increase the bargaining power of raw-material producers in their dealings with the industrial consumers.

3. Larger Internal Market:

When trad­ing restrictions are reduced and goods can pass easily from one country to another, manufacturers within the bloc can reach a much larger market than any single country could provide. This allows for larger-scale and more efficient production which in turn allows members to produce more goods more competitively for export outside the trading bloc. As internal trade has grown so the ex­ternal trade of the Common Market has increased substantially, though not as fast as internal trade.

4. Greater Regional Specialization:

Free trade policies allow for more specialization of production in the areas best suited to the making of particular products. Free trade is impossible on a world scale but within a trading bloc it is possible and industrial and agri­cultural specialization can take place, with benefits in the cheapness and efficiency of production.

5. Political Unity:

Trading blocs such as the Common Market have as a long-term aim some form of political unity. The main reason for this is that the long-standing rivalry between the various European powers has led to two world wars which have greatly disrupted world trade. Thus the for­mation of an association in which the European countries can work together will lead to less fric­tion and greater chances of world peace. ASEAN (Association of South-East Asian Nations) encour­ages economic and political co-operation in South- East Asia.

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Essay # 3. World Trading Blocs:

There are several trading blocs in the world today and though they all have broadly similar aims, there are great differences in purpose and progress achieved from one to another. It is therefore in­teresting to look at each major group separately.

1. The European Economic Community (Common Market):

This is both the tightest asso­ciation and the one which has progressed furthest in trade and general economic integration. It was founded in 1957 by the Treaty of Rome, the ori­ginal six members being France, West Germany, Italy, Belgium, Netherlands and Luxembourg. At first Britain and other European countries did not feel it was in their best interests to join, e.g. Brit­ain had close trading ties with Commonwealth countries.

However, by 1973 trading conditions had changed and at that time Britain, Denmark and Ireland joined the EEC. Norway decided to re­main outside. In 1981 Greece joined the Common Market and some other countries including Spain, Portugal and Turkey may eventually enter the as­sociation.

Although established in 1957 the Common Market did not immediately abolish all tariffs and restrictions. This had to be done gradually to allow the economies of the various countries to adjust to the changes. Most restrictions on trade in industrial goods were removed by 1967, however, and a common external tariff had come into operation.

Integration of agricultural development has been and will probably be the biggest single problem, since many of the member states have large agri­cultural populations and farming is highly pro­tected. Farmers receive guaranteed prices for their products which are usually high.

This has encour­aged farmers to increase in efficiency and many agricultural products are overproduced. Each year we hear of a ‘butter mountain’ or ‘milk lake’. Beef and wheat are also overproduced and have to be stockpiled.

Stocks must either be destroyed or sold at low prices, e.g. to the U.S.S.R. Despite dif­ficulties with the Common Agricultural Policy the EEC has been very successful. It accounts for a third of world trade and about 45 per cent of trade in manufactured goods.

Five of the members of the EEC are former colonial powers and many of the developing coun­tries which were formerly their colonies have as­sociate status through an agreement called the Lome Convention. This gives 57 countries in Africa, the Caribbean and the Pacific—the ACP countries- concessions on tariffs to the extent that 99 per cent of their exports to the EEC will be duty free.

It also helps them to stabilize their export earnings from twelve agricultural commodities through a scheme called Stabex. If exports to the EEC in any one of the twelve commodities fall below the aver­age for the previous four years compensation is paid. The most important imports from ACP coun­tries are oil, coffee, copper and cocoa.

2. European Free Trade Association (EFTA):

This is an association of eight European countries: Norway, Sweden, Iceland, Austria, Switzerland, Portugal, Finland and Faroe Islands. Britain and Denmark were founder members of EFTA but left to join the EEC. The EFTA coun­tries did not wish to join the EEC for trading or political (Sweden, Switzerland which are neutral countries) reasons and instead formed a looser trading association in 1960 at the Convention of Stockholm.

Tariffs have been substantially reduced or abolished on most goods, especially manufac­tured goods, but unlike the EEC no external tariff barrier has been erected and this allows for existing arrangements with Commonwealth countries, for example, to be maintained.

Trade between member countries has grown substantially since EFTA’s inception, but is not on as large a scale as internal trade within the EEC, partly because of the similarity of products of many of the countries. Moreover, most of the member countries have strong trading links with the Common Market countries or with other parts of the world.

3. Comecon:

This trading bloc consists of the U.S.S.R. and its East European satellites-East Ger­many, Poland, Czechoslovakia, Hungary, Bulgaria, and Romania, as well as Mongolia. It was estab­lished in 1949 but has made little progress as yet towards freeing trade or integrating economic development, partly because many countries of eastern Europe do not wish to be too closely in­tegrated with the U.S.S.R. since Russia would then have both political and economic dominance.

4. LAFTA:

The Latin American Free Trade Asso­ciation, which was formed in 1960 by the Treaty of Montevideo, consists of Mexico and all the South American republics except the Guianas. None of the states has much trade with one an­other as yet because of similarity of products (only about 10 per cent of total Latin American trade is within LAFTA). This position is gradually improving but it will be many years before a really meaningful association can be built up, for most Latin American states trade largely with the indus­trial countries of the northern hemisphere.

Tariffs have been lowered or abolished and there are plans for integrating agricultural and industrial development and opening up new areas. The sub­group within LAFTA consisting of the Andean states (Chile, Peru, Bolivia, Ecuador, Colombia) has so far been the most successful in trade and econ­omic integration.

5. ASEAN:

ASEAN was formed in 1967 and groups together the five fastest growing countries of the region—Indonesia, Malaysia, Thailand, the Philippines and Singapore. Tariffs between these countries are being reduced and intra-regional trade is increasing but trade between ASEAN and the rest of the world is growing faster. The main reason for this is that all the countries except Singapore are primary producers whose main mar­kets are in the industrial West and Japan.

ASEAN countries are also dependent on these developed countries for investment in their growing indus­tries. One of the main ways in which ASEAN helps its members is by presenting a joint negotiating stance when dealing with Japan, EEC and Aus­tralia and New Zealand. The aim is for ASEAN as a whole to negotiate preferential agreements with trading partners similar to the status of the ACP countries with the EEC but this has so far made little progress.

There are several other trading associations, in­cluding a Central American trading association consisting of Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, which has so far had little success; and the more recently formed CARIFTA, an association of Commonwealth Caribbean countries. There are several groups of countries in Africa with trading treaties but no single trading bloc, though such a scheme has been suggested.