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Discuss whether the formation of regional trading groups, such as ASEAN and NAFTA, is desirable

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Introduction

Oct/Nov 2008 Section B Q4 (b) : Discuss whether the formation of regional trading groups, such as ASEAN and NAFTA, is desirable. (12) The formation of regional trading blocs can provide both advantages and disadvantages for the members and for countries outside the blocs. There are three main types of trading bloc. The least integrated one is a free trade area. Members of a free trade area agree to remove trade restrictions on each other's exports. A customs union goes a stage further, requiring member countries not only to remove trade restrictions between each other but also to impose the same tariffs on non-members. ...read more.

Middle

The diagram below shows that if before membership a country had imposed a tariff on another member, the removal of the tariff will lower prices and lead to a net welfare gain. Domestic output was initially a, domestic consumption was b and imports ab. After the removal of the tariff, consumption rises to c, domestic output falls to d and imports increase to dc. Producer surplus falls by 1 and there is a loss of tariff revenue of 3. Consumer surplus, however, increases by 1, 2, 3 and 4 and so there is a net gain of 2 and 4. ...read more.

Conclusion

If this extra loss of tariff revenue, 5, is greater than the gain of 2 and 4, there will be a net loss. Trading blocs seek to promote competition between member countries' firms and this may encourage them to become more efficient which will increase their ability to sell within and outside the trading bloc. Members can also gain from the strong bargaining power that a trading bloc may possess. Countries outside the trading bloc may benefit from it growing if such growth results in it buying more imports. Being outside the bloc, however, they may find it difficult to sell their products to members of the bloc and so take advantage of its growing prospects. Being outside a trading bloc may also weaken a country's bargaining power in international trade negotiations. ...read more.

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