For example, France is a member state of the EU who is first partner and its major source of surplus. French exchanges out of the union are relatively concentrated so that eighty percent of the French trade with the industrialized countries is destinated toward OCDE countries including sixty three percent toward EU countries.
As far as agriculture is concerned, we can notice that it is hard for countries that are not members of the European Union to sell their products because EU products are subsidized. Subsidizing is one of the protectionist measures that a country can use to draw aside foreign competitors who are not among the members of the trade bloc.
II – Economic advantages of forming a regional trade bloc like the EU
1 – Forming a trade bloc increases exchanges
Forming a trade bloc like the EU has a great advantage notably for the poorest countries of the treaty by increasing exchanges and implementing the free circulation of goods (without any tariff barriers) and people.
In addition, it enables its members to boost their economies and it emproves the country well – being. Belonging to the North Atlantic Free Trade Area for Mexico enable the country to boost its economy and might slow down the waves of illegal immigrants.
2 – Simplifies exchanges
Belonging to a trade bloc simplifies exchanges between the members, as there are less bureaucracies and papers to fill in. It also enables companies to save money on tariff barriers, which in turn is supposed to benefit to the consumers thanks to lower prices.
3 – Increases competition and lowers prices
Forming a regional trade bloc like the European Union allows the opening of frontiers for all its members. As a consequence, the countries where the labour force is expensive (like Germany or France in Europe and the USA) would be able to accede to a cheaper labour force from the Eastern countries for the EU and from Mexico for NAFTA.
Thanks to this cheaper labour force, products will be cheaper and more competitive in the market.
The increase of competition lowers prices or costs, enhance ability to achieve scale economies and increase the ability of attracting direct investments by foreign companies.
4 – Increases opportunities for business investments
Belonging to a regional trade bloc like the EU increases opportunities for business investments because it could be a way to conquer other markets. In that case, belonging to NAFTA could be a spring-board for the US to conquer and tap South American markets as Mexico is already a member state.
5 – Better working conditions for the less favoured nations
Thanks to the opening of frontiers, people will be able to circulate freely. For example, Eastern workers may be able to move and benefit from better living standards and working conditions in western countries.
It is also an opportunity for workers to upgrade their skills and gain more advance job training. All that enables countries to improve their competitiveness because of an educated and more skilled workforce.
6 – CAP
The members of a customs union like the EU can take advantage of Brussel’s subsidies as regards agriculture and the Common Agricultural Policy (CAP).
The aim of the Common Agricultural Policy is to provide farmers with a reasonable standard of living and benefit to consumers because it offers them quality food at fair prices. It was created to guarantee farm incomes, food safety, quality and environmentally sustainable production.
III – Economic disadvantages of forming a regional trade bloc like the EU.
1 – Economic interdependence
The United States and Europe are the most dominant powers in the world.
Actually, they supply half of both global GDP and exports, 40 per cent of all trade in goods and a higher share of trade in services.
However they are major traders with each other. They are the more interdependent economies in the world.
For example, in 2000 US investors accounted for 77 % of new foreign direct investment in Europe. Moreover two thirds of all foreign investments by the EU were destinated to the USA.
2 – Economic dependence
Eventhough, a regional trade agreement could be a positive thing for developing countries that would have the opportunity to enter high purchasing power countries like the United States, it does not prevent some countries (including developing ones such as Mexico) from having troubles.
Therefore, it depends on the level of dependence of each country.
As far as Mexico is concerned, the country will face lots of problems due to its dependence on the US one. As a matter of fact, the country sells 90 % of its exports to the USA.
Since the implementation of NAFTA, Mexican fear a sudden American slowdown which can cause bankruptcy. If the US economy slowdown (as in 2001), US investments would stop, the maquiladoras opened at the Mexican US border and which manufactured goods with US labels would close down and thousands of Mexican workers would be laid off.
This level of dependence might lead to bankruptcy and damages the economy of the country because the higher the unemployment is, the less people consume and the fewer companies sell and the countries would enter into a vicious circle.
3 – Return to protectionism
The economic difficulties in developing countries members of the APEC (Asia-Pacific Economic Cooperation) and of the Cairns Group attracted foreign investments but the Mexican peso crisis of December 1994, the Argentina economic collapse of 2001 and Brazil’s financial scare of 2002 have shaken the investors’ confidence.
All these financial crisis could lead to trade protection or closing capital accounts.
4 – Worsening social conditions.
Regional trade agreements and the opening of frontiers could lead to a flood of the inhabitant of the poorest countries of the agreement.
As far as NAFTA is concerned, there is an hostility against this agreements because we can notice that it entails the lay off of US workers as US firms relocate to take advantage of low trade unions, labour costs in Mexico and the flood of Mexican immigrants who would steal the US workers’ jobs or accept bad working conditions that the Americans would be obliged to accept too to keep their jobs.
5- Worsening the quality of the products.
The products made in the poorest countries of the regional trade agreement are cheaper, they might be unhealthy, unsafe or bad quality as environmental laws are less strict and safety norms are not yet harmonized.
6 – Africa and protectionism
Regional trade agreements have positive points for the member countries because they enable their members to develop their exchanges, Free Trade Areas (EU, NAFTA…) are often regarded as going against the rules of globalization asthey prevent non member countries from developing by excluding them from world trade. Consequently, the poorest countries of the world are excluded from this area.
Moreover, regional trade agreements like the EU disadvantages African countries which can not be able to compete with subsidized countries (like the EU) as far as agriculture is concerned. For example, Mali is the first exporter of cotton in the world. H owever the country is in front of some difficulties because its first competitor (the United States) subsides its cotton exports.
That is why in the WTO Doha Round, African countries insisted on the reduction and elimination of Northern, especially EU subsidies for agriculture to give African farmers the opportunity to accede to high purchasing power markets.
7….About taxes
All the citizens of a member state can live in any country of the European Union. However, they have to pay their tax in the country where they earn their wages but we can notice that there is a big difference as regards taxes between countries, people with very high wages move to low taxes countries.
8 – Discrimination between countries
The implementation of a customs union encourages intra-community trade. As a consequence cheaper imports from non partners country may be replaced by expensive imports from a better country. In that case, it allows free trade between members while restricting imports from outside countries.
9 – Redundancies
As competition is often tougher when the customs union is implemented, regional trade agreements may entail rounds of redundancies.
The opening of markets led to much restructuring and downsizing due to foreign competition.
Eventually, forming a trade bloc is a step toward free trade as it simplifies exchanges, as it boosts the economies of the poorest countries of the agreement and because it lowers prices by raising competition. However, we can not but notice that it is a step toward protectionism because it pushes back all the non member countries and encourages discrimination between countries.
