Trade blocks

1. Trade blocks

2. Trade block • A trade bloc is type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade (tariffs and non-tariff barriers) are reduced or eliminated among the participating states.

3. One of the first economic blocs was the German Customs Union (Zollverein) initiated in 1834, formed on the basis of the German Confederation and subsequently German Empire from 1871 • By 1997, more than 50% of all world commerce was conducted under the auspices of regional trade blocs. • International business is significantly impacted by schemes of economic integration of different nations.

4. members of successful trade blocs usually share four common traits: • similar levels of per capita GNP, • geographic proximity, • similar or compatible trading regimes, • and political commitment to regional organization.

5. Advocates of worldwide free trade are generally opposed to trading blocs, which, they argue, encourage regional as opposed to global free trade. • Scholars and economists continue to debate whether regional trade blocs are leading to a more fragmented world economy or encouraging the extension of the existing global multilateral trading system.

6. Motivation to form trading blocks: • To obtain economic benefits from: • Achieving a more efficient production structure by exploiting economies of scale thorough spreading fixed cost over large regional markets. • Increased economic growth from foreign direct investment. • Learning from past experience. • To pursue non economic objectives like strengthening political ties & managing migration flow. • To ensure increased security of market access for smaller countries by forming regional trade blocks with larger countries.

7. Motivation contd… • To improve member’s bargaining strength in multilateral trade negotiations or to protest against the slow pace of trade negotiations. • To promote regional infant industries which can not be viable without a protected regional market.

8. Trade blocs can be stand-alone agreements between several states (such as NAFTA) • OR part of a regional organization (such as the European Union).

9. Forms of integration

10. Depending on the level of economic integration, trade blocs can fall into different categories, such as: • preferential trading areas, • free trade areas, • customs unions, • common markets • and economic and monetary unions.

11. A Preferential trade area (also Preferential trade agreement, PTA) is a trading bloc which gives preferential access to certain products from the participating countries. • This is done by reducing tariffs, but not by abolishing them completely. A PTA can be established through a trade pact. • It is the first stage of economic integration. The line between a PTA and a Free trade area (FTA) may be blurred, as almost any PTA has a main goal of becoming a FTA in accordance with the General Agreement on Tariffs and Trade.

12. Examples: • The EU and the ACP countries • India and Afghanistan • India and Mauritius

13. Free trade area is a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) goods and services between them. It can be considered the second stage of economic integration. Countries choose this kind of economic integration form if their economical structures are complementary. If they are competitive, they will choose customs union.

14. A customs union is a free trade area with a common external tariff. The participant countries set up common external tradepolicy, but in some cases they use different import quotas. Common competition policy is also helpful to avoid competition deficiency. • Purposes for establishing a customs union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries. • It is the third stage of economic integration. • Customs union is established through trade pact.

15. A common market is a customs union with common policies on product regulation, and freedom of movement of the factors of production (capital and labor) and of enterprise. The goal is that movement of capital, labor, goods, and services between the members is as easy as within them. This is the fourth stage of economic integration.

16. An economic and monetary union is a single market with a common currency. It is to be distinguished from a mere currency union (e.g. the Latin Monetary Union in the 1800s), which does not involve a single market. This is the fifth stage of economic integration. EMU is established through a currency-related trade pact.

17. European Union (EU) • The European Union (EU) is an economic and political union of 27 member states, located primarily in Europe. It was established by the Treaty of Maastricht, which was signed in February 1992 and came into force in November 1993, on the foundations of the pre-existing European Economic Community. With almost 500 million citizens, the EU combined generates an estimated 30% share (US$16.8 trillion in 2007) of the world's nominal gross world product

18. The EU has developed a single market through a standardized system of laws which apply in all member states, guaranteeing the freedom of movement of people, goods, services and capital. It maintains a common trade policy, agricultural and fisheries policies, and a regional development policy. • Sixteen member states have adopted a common currency, the euro. It has developed a role in foreign policy, representing its members in the World Trade Organization, at G8 summits, and at the United Nations. Twenty-one EU countries are members of NATO. The EU has developed a role in justice and home affairs, including the abolition of passport controls between many member states under the Schengen Agreement, which incorporates also non-EU states. • EU is by far the most advanced case of economic integration.

19. EU required every member country to: • Eliminate tariffs ,quotas & other barriers on intra community trade. • Device a common internal tariff on their imports from the rest of the world. • Allow the free movement of factors of production within the community • Harmonies the taxation & monitory policies & social security policies. • Adopt a common policy on agriculture ,transport, & competition in the industry.

20. EU is intended to achieve: • Unification of economies of the member nations in to a single market by removing all border barriers to trade & factor mobility • unifying the economic policies & regulations.

21. Barriers targeted for removal : • Border control. • Limitations on the movement of people & their right to establishment. • Differing internal taxation regimes. • Lack of common legal framework for business. • Controls on movement of capital. • Heavy-and differing-regulation of services. • Divergent product regulations and standards. • Protectionist public procurement policies.

22. EU size • 500 million citizens (more than US) • GDP US$16.8 trillion in 2007. • Accounts for quarter of world trade. • Unification is expected to produce great benefits for the member nations.

23. EU would lead to : • Restructuring of the economy. • Improved efficiency. • Improvement in production. • Trade creation. • Increase in income ,employment & consumption. • May result in significant reduction in prices.

24. Real purpose of the single market is to boost the competitiveness of European industry against its rivals ,particularly the USA, Japan & south-east Asian countries. • Benefits of liberalization will not be extended to non-EU countries in a unilateral & automatic way, non-members who want to sell their goods and services in EU will have to do it on reciprocal basis.

25. Indo-EU trade • EU is very important trading partner of India. • Total trade with EU 100000 crore (2005-06) • Largest trading partners with India are UK, Germany, France & Belgium. • Indian exports to EU : textile, jute, leather & leather goods, polished diamonds, engineering goods, chemicals etc. • Indian imports from EU: edible oil, dairy products, capital goods, optical instrument, aluminum & copper products.

26. NAFTA • North American Free Trade Agreement is very important free trade area of developed & developing countries. • Significant feature of NAFTA is that , while the most FTA’s (free trade agreements) have provisions for the trade liberalization , it includes labor standards, and environmental standards.

27. Business government trade relation

28. Political, economic, and cultural motives behind governmental intervention in trade • Despite the advantages of free trade, government intervention is common. • The main political motives behind government intervention in trade include: • protecting jobs • preserving national security • responding to other nations on fair trade policies • gaining influence over other nations

29. Contd... • The most common economic reasons given for nations attempt to influence international trade are: • protection of young industries from competition • protection of a strategic trade policy

30. Contd… • According to the infant industry argument, countries even emerging industries need protection from international competition during their development phase, until they become sufficiently competitive internationally. BUT….. • this argument can cause domestic companies to become: • noncompetitive, • and inflate prices

31. Believers in strategic trade policy argue that government intervention can help companies: • take advantage of economies of of scale • and the first movers in their industries.

32. But government assistance to domestic companies can result : • in inefficiency, • higher costs, • and even trade wars between nations. • Perhaps the most common cultural motive for trade intervention is protection of national identity.

33. Methods governments used to promote international trade • A subsidy is financial assistance to domestic producers in the form of cash payments, low interest loans, tax breaks, product price supports, or some other form. • It is intended to assist domestic companies in fending off international competitors. • Critics charge that subsidies amount to corporate welfare and are detrimental to the long-term.

34. Governments also can offer export financing • lends to exporters that they would not otherwise receive or linens at below market interest rates. • Another option is to guarantee that the government will repay a companies lend if the company should default on repayment -- called a loan guarantee.

35. Most countries permit trade with other nations by creating what is called a foreign trade zone (FTZ) -- a designated geographic region in which merchandise is allowed to pass through with lower customs duties (taxes) and/or fewer customs procedures.

36. FTA’s • Free trade area is a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) goods and services between them. • It can be considered the second stage of economic integration. Countries choose this kind of economic integration form if their economical structures are complementary. If they are competitive, they will choose customs union.

37. Unlike a customs union, members of a free trade area do not have the same policies with respect to non-members, meaning different quotas and customs. To avoid evasion (through re-exportation) the countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods. Goods that don't cover these minimum requirements are not entitled for the special treatment envisioned in the free trade area provisions.

38. Within an industrialized country there are usually few if any significant barriers to the easy exchange of goods and services between parts of that country. For example, there are usually no trade tariffs or import quotas; there are usually no delays as goods pass from one part of the country to another (other than those that distance imposes); there are usually no differences of taxation and regulation. Between countries, on the other hand, many of these barriers to the easy exchange of goods often do occur.

39. The aim of a free trade area is to so reduce barriers to easy exchange that trade can grow as a result of specialisation, division of labour, and most importantly via (the theory and practice of) comparative advantage. The theory of comparative advantage argues that in an unrestricted marketplace (in equilibrium) each source of production will tend to specialize in that activity where it has comparative (rather than absolute) advantage. The theory argues that the net result will be an increase in income and ultimately wealth and well-being for everyone in the free trade area.

40. However the theory refers only to aggregate wealth and says nothing about the distribution of wealth. In fact there may be significant losers, in particular among the recently protected industries with a comparative disadvantage. The proponent of free trade can, however, retort that the gains of the gainers exceed the losses of the losers

41. Some free trade areas • African Free Trade Zone (AFTZ) • European Economic Area (EEA) • North American Free Trade Agreement (NAFTA) • South Asia Free Trade Agreement (SAFTA)

42. Regional trade agreement • A regional trade agreement (RTA) is an economic trade agreement to reduce tariffs and restrictions on trade between two or more nations within a certain region. • There are currently 205 agreements in force. • There are a variety of RTAs; with some being quite complex (European Union, while others are far less intensive (North American Free Trade Agreement).

43. For the most part, governments are supportive of further RTAs; • However, there has been some concerns expressed by the WTO. • The proliferation of RTA ..is breeding concern: • concern about incoherence, • confusion, • exponential increase of costs for business, • unpredictability and even unfairness in trade relations.

44. Regional integration • Regional integration is a process in which states enter into a regional organization in order to: • increase regional cooperation and • diffuse regional tensions.

45. Past efforts at regional integration have often focused on : • removing barriers to free trade in the region, • increasing the free movement of people, • labor, goods, and • capital across national borders, • reducing the possibility of regional armed conflict (for example, through Confidence and Security-Building Measures), and adopting cohesive regional stances on policy issues, such as the environment.

46. Regional integration has been defined as an association of states based upon location in a given geographical area, for the safeguarding or promotion of the participants, an association whose terms are fixed by a treaty or other arrangements. • regional integration as a worldwide phenomenon of territorial systems that increase the interactions between their components and create new forms of organisation, co-existing with traditional forms of state-led organisation at the national level.

47. regional integration refers to the process by which states within a particular region increase their level of interaction with regard to economic, security, political, and also social and cultural issues. In short, regional integration is the joining of individual states within a region into a larger whole. The degree of integration depends upon the willingness and commitment of independent sovereign states to share their sovereignty.

48. Regional integration initiatives, should fulfill at least eight important functions: • the strengthening of trade integration in the region • the creation of an appropriate enabling environment for private sector development • the development of infrastructure programs in support of economic growth and regional integration • the development of strong public sector institutions and good governance; • the reduction of social exclusion and the development of an inclusive civil society • contribution to peace and security in the region • the building of environment programmes at the regional level • the strengthening of the region’s interaction with other regions of the world

49. Regional economic integration • Regional economic integration is an agreement among countries in a geographic region to reduce and ultimately remove, tariff and non tariff barriers to the free flow of goods or services and factors of production among each others. It can be also refers as any type of arrangement in which countries agree to coordinate their trade, fiscal, and/or monetary policies are referred to as economic integration. Obviously, there are many different levels of integration. • Free Trade Area: A free trade area occurs when a group of countries agree to eliminate tariffs between themselves, but maintain their own external tariff on imports from the rest of the world. The North American Free Trade Area is an example of a FTA.