Becoming part of Trading Blocs.

Peter Hill

Introduction to International Business, Year 1, Level 4

Luiz Montanheiro

Becoming part of Trading Blocs

Trading blocs are suggested to be an efficient way to create a sustainable economic growth. This will now be explained, giving detail as to the advantages and disadvantages to countries when becoming part of trading blocs. Referencing will be used throughout; illustrating where the relevant information has been found, as well as a Bibliography, which will lead into further detail about the research gathered.

On a global scale, organisations like the World Trade Organisation, (also known as the WTO) aim to free up world trade from any trade barriers. These trade barriers are also trying to be lowered on a more regional scale, by groups of countries, which can also be looked at as Trade Blocs. This is being done so that regional trade can be stimulated. The regional co-operation is seen to be a very important cause of the economic growth for the reason that trade is being created. Some of the larger trading blocs can be recognised as, NAFTA (North American Free Trade Area) between the United States of America, Canada and Mexico, Asean (Association of South East Asian Nations) which consists of Singapore, Malaysia, Indonesia, Thailand and the Philippines. The largest and in some peoples opinion, best established trading bloc however is the EU (European Union) which is a 15 country organisation including the United Kingdom, France, Germany, Spain and Italy. These will later be used with positive and negative effects on countries when becoming part of trading blocs.

As has just been explained, there are a number of different trading blocs, which have social, cultural, political and economic effects. With this, there are different methods of trade, aiming to create a more favoured economic growth. A few examples of these trading blocs can be seen below from the least integrated to the most integrated.

Free Trade Area (FTA)– This type is used by NAFTA for example, and is where the independent countries who belong to this area trade freely between themselves, however, have got individual trade barriers with countries who do not belong to this area.

Customs Union – As well as getting rid of the internal tariffs between countries involved in the trading bloc, the members also have a common external tariff on goods which are being imported from members not involved in that bloc.

Common Market – This is similar to the previous Customs Union, however in addition has the free movement of production factors, which could include labour and capital. The common market has a great advantage to workers whereas, if it weren’t available, they would have to apply for a working visa, which may be hard to come by. This is done without any restriction and is used by MERCOSUR, which comprises of different South American countries.

Economic Union – through complete economic integration, countries create a greater economic harmonisation. This is done through the members adopting a common economic policy. ...

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Economic Union – through complete economic integration, countries create a greater economic harmonisation. This is done through the members adopting a common economic policy. There is not yet a region, which has created complete economic integration, however, the European Union has come the closest, with many factors including a common currency coming into play.

Introducing trading blocs has got both advantages and disadvantages to companies as well as countries given as a whole. Taking away internal barriers gives companies the chance to achieve economies of scale, being able to offer their facilities on a larger range within that particular trading bloc as well as them being able to compete on an international front. Larger companies also see the opportunity for global expansion as has recently been expressed in an American newspaper article, the Bloomberg News. The article has focussed on ProLogis and AMB Property Corp., who are the two largest industrial real estate companies in the United States. Executives at both companies explained that:

“The continued expansion of the European Union, with 10 Eastern European nations joining in 2004 to create the worlds largest trading bloc, should make it easier and less costly to transport goods between countries.” (Bloomberg News, December 27, 2002)

I feel that this has a major advantage to members of the EU by creating trade, showing that major companies are showing interest in expanding into Europe, bringing with them money and job prospects to the country.

The use of Economic Integration however, does have some setbacks in that it exposes a companies home market from those that are located in other member countries meaning that they are no longer protected by the barriers which the once were. This threatens those that are less efficient as they will find it very difficult, if not impossible to compete with more efficient producers from outside their domestic market.

With trade blocs promoting the efficiency of the world’s economy, in that production costs are reallocated from high producers to low producers within the trading bloc, they actually damage economic efficiency. This is done by changing production from lower cost external producers to higher cost internal producers, therefore products are more than likely going to become uncompetitive within the internal market after a higher tariff wall has arisen. This has got both good and bad points to the countries and companies within the trading bloc. A good point that can be seen is that jobs are being created if production is shifted from the use of external producers to internal producers. This can also be bad however, for the simple reason that the company (as previously stated), will become uncompetitive in the internal market. This has a disadvantage to the country as home-grown companies are failing to succeed in their domestic markets, in some cases being left failing to survive.

Before entering a trade bloc, a country has to weigh up the pros and cons between, the disadvantage of the costs of opening its own market to more foreign competition and the advantages that would be gained from getting better access to the blocs preferred market. The gain of this access would always be greater than any disadvantage, so countries would always put forward an application for an existing bloc.

The member countries of the bloc have got to consider their personal advantages against their disadvantages of the acceptance or rejection of the new member. When deciding this, the gains from getting access to the new members market are compared with the losses from sharing its original market with the proposed new member. If the bloc in talks with the prospective new member is small, then the benefits will outweigh the disadvantages therefore are willing to accept the new country for membership. If the trading bloc is large then they will have less need for any expansion, as the incentive will decrease. This will eventually reach a point when there is absolutely no incentive for the member countries to expand.

As well as the size of the current trading bloc, before agreeing to accept a new applicant for membership, the economic status of the country in hand would need to be looked at. Different outcomes from this would help to come to a conclusion. One problem that consists to be a factor is that, the better position the country is actually in economically, then the more they will have to put back into the bloc where finances are concerned. As Britain is seen to be in a good economic position in relation to the rest of the European Union, then they put more back in, in comparison with a country such as Portugal for example. The disadvantage that this makes for companies and employees of companies in Britain is that this money is being taken from them. This may be in the form of tax’s etc. another negative point is that Membership of the EU costs the UK around £1.25 million every hour of every day, which is enough to pay for hospitals, doctors, schools, teachers and police, still leaving money for possible tax cuts. One advantage that it has got however is that it is keeping countries within the trading bloc stable, which will be beneficial to everyone in some way or another in relation to trade.

Although I have named the above as being a bad point, it doesn’t stop the European Union from being “the biggest trading bloc in the world”. An article from ‘The Journal’ (Newcastle, UK), shows that manufacturing in the north-east of England gains 75 million more customers. It illustrates the fact that:

“In the last quarter of last year the region sold about 8bn of goods and services around the world. This figure has also been growing despite difficulties caused by events of September 11th.”

I think that this is a very positive point to look upon for future development and holds many benefits to the EU, especially looking at the fact that there are possibly new countries joining within the next two years. This enlargement will give a great boost to UK companies. The article also explains the fact that each previous enlargement has seen a surge of UK exports to the EU’s new members.

“Within a few years of their membership, for example, the value of UK exports to Spain increased by 23% and to Finland by 31%”

These figures stated prove to be very promising for countries within the EU as a further enlargement is said to make it the biggest trading bloc in world by far. As can be seen in the above, this gives countries within the UK a larger opportunity to expand and begin to sell abroad, however, they are at risk of greater competition within their domestic market. This has got a very positive effect on both member countries involved in the import and export of goods and is a strong reason to why countries want to be a member of the EU.

When being a member of a trading bloc there may be problems that arise concerning the bloc as a whole, however, decisions are made individually between member countries. By this, I mean the single currency within the European Union. The majority of countries have got this currency in use at this present time, although are still a few countries who are hesitant to join. A former Finance Minister, Sean Farren stated that:

“A single currency is a logical requirement of a single market”(Belfast Telegraph January 7th 2003)

By stating this, it overlooks the fact that NAFTA have got no intention of having a single currency and neither does South Asian countries. One of the reasons that Britain does not want to join the Euro is that it’s claimed that jobs will be lost. This would have a great disadvantage to the country, as current figures suggest that Britain’s unemployment figures be amongst the lowest in Europe, whereas Germany for example had figures of 4.22 million unemployed with a predicted rise in the early months of 2003. There is also an argument, which recommends that we should join it. This is to help attract more investment and customers from elsewhere. This is going to be easier if we are doing business in their currency and not if we’re asking them to use our fluctuating exchange rate.

In conclusion, there are both negative and positive effects on countries when joining a trading bloc. These points have been put forward, with the use of examples to strengthen the theory. Before becoming a member, both, the member countries and the actual country in hand has got to weigh the pros and cons to find out as to what is going to be most beneficial to them, in relation to what each are going to get out of the situation. This may take a long time, and the waiting list may be between a few countries at any given period. At this moment in time, Turkey is waiting to see if they are going to become the most recent member of the EU. I feel that overall, a country hasn’t got anything to lose when wanting to join a trading bloc as the benefits would be much greater than if they decided against it.

Number of Words: 2004 – not including Referencing given below

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