Assess the economic effects of the growth of trading blocs on the global economy

by mindcrypt (student)

"Assess the economic effects of the growth of trading blocs on the global economy" [20]

Trading blocs are groups of countries that agree to reduce trade barriers amongst themselves. This is used to promote trade activities within certain areas, whilst also assisting in economically managing specific regions. By implementing trade blocs it provides a means of agreement between the countries within that trade bloc to enable them to benefit from each other through trade.

A trading bloc increases and creates trade between countries. Trade creation occurs when consumption shifts from a high cost producer to a low cost producer. For example, if the UK started taxing imported Brazilian sugar, but did not tax imported European Union sugar, consumption would shift to European Union sugar because it is cheaper than Brazilian. Low cost imports lead to the imported items having a lower price tag which then leads to greater consumption, with increased demand resulting from lower prices. This leads to greater efficiency for the consumer which means that EU sugar has the comparative advantage. As shown in the graph, as aggregate demand in the trade bloc increases, so does output, and real GDP.

However although real GDP may rise, depending on the elasticity of the aggregate supply curve, there could be a large rise in the general price level, which could lead to inflation within the trade bloc. Inflation within the trade bloc could also lead to global inflation rates.

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Due to the protectionism of the trade bloc, it could lead to rising inequality between the bloc countries and the countries which attempt to import. This can be seen with countries in Africa, and South America who attempt to import raw materials and foodstuffs into the EU, but are prevented from doing so because of tariffs imposed on them. They are trying to stimulate their country’s economy through export led growth, but this is stifled if other countries are barring their entry to the global market.

Furthermore, within trading blocs with free trade, members knowing that they have access to each other’s markets, members are encouraged to specialize, countries can then benefit from Another economic effect of trading blocs is that it can make companies from outside certain trading blocs struggle. An example of this is that European steel companies such as Mittal will struggle to sell their goods in the United States because they put up such a high tariff even though the US is such a large market. Many companies may struggle to expand business on a global scale as a result of the tariffs.

Also trading blocs increases geographical mobility of workers, for example, an accountant from London can go to Germany freely if they wanted to because of a free movement of labour agreement. However, the problem with free movement of labour, is many people who live in a poorer and less affluent country will often move to a wealthier country in hope of finding better work that pays more. Much of this money is then sent home, which means it leaves the host economy. This is a removal from the circular flow. Trading blocs are also used as protection; an economy will have more economic presence as a group, this also increases political stability and support from trading bloc members.

I think that overall, the economic effects of trading blocs on the global economy is negative to the majority of countries around the world that are not within a trading bloc. Although the countries within the trading bloc benefit from free trade within the countries, countries outside the bloc may have comparative advantage. It skews what should be world economic growth, and deprives some countries of being able to develop.