8 julio, 2024

Economic blocks: characteristics, types, examples

The economic blocks or trade blocs are a group of countries that have reduced or eliminated trade barriers for their members. These blocs are a form of economic integration and constitute an important structure of world trade. Examples of economic blocs are the European Union or Mercosur.

To form an economic bloc, countries enter into international treaties. Normally, these blocks have their own administrative and regulatory bodies. Some also set political goals.

The purpose of the economic blocs is to free trade from protectionist measures, creating a favorable environment for trade between their members.

The strengthening of the economic interdependence of countries as a result of regional integration and the globalization of international economic relations provides a strong impetus to the development of economic blocks at the national, regional and global levels.

The World Trade Organization allows the existence of economic blocs as long as they result in less protection against outside countries than existed before the creation of these blocs.

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Characteristics of the economic blocks

Freedoms and economic barriers

What is sought is that the member countries of the economic bloc have free trade with each other, while establishing barriers to trade with non-associated countries, generating a significant impact on the world trade pattern.

Agreement between countries

A regional organization is created, where barriers to international trade between member countries are reduced or eliminated, allowing them to trade with each other as smoothly as possible.

Size of the market

The economic blocs result in an increase in foreign direct investment, benefiting the economies of the participating nations. Local investment also increases, as the overall size of markets for companies increases.

Opportunity to import-export

These international trade agreements open up new opportunities for exporters, in addition to guaranteeing access to imports from other countries at competitive prices.

economic leverage

The economic leverage of the entire trading block is increased. The creation of a larger market thus makes it possible to generate greater production.

Formation of economic blocs

In the 1980s, multilateral trade negotiations were slow and tedious, leading the United States to move away from its policy of only setting up multilateral trade negotiations as a mechanism to promote free trade.

This has produced a profound change in the structure of the international economy due to the international improvement of regional trading blocs in all parts of the world. An economic block can influence in its favor in terms of commercial exchange more easily than individual countries.

Comparison with business mergers

It is interesting to compare the formation of the economic blocs with the business merger process. If two or more companies merge, they will initially be able to gain a competitive advantage over their competition.

However, competitors will increasingly respond through their own mergers or other forms of attempts to not be left behind in the competitive fight. The end result will then be a new form of competitive equilibrium where only large corporations will trade with each other.

Types of economic blocks

preferential trade areas

When nations within a geographic region agree to remove or reduce tariff barriers on selected goods imported from other countries in the region.

free zone

Duties, taxes and customs fees are abolished, as well as quantitative restrictions in mutual trade, in accordance with an international treaty of the member countries. Each member country can independently determine its trade regime with respect to third countries.

Customs union

The abolition of customs duties in trade between member countries is agreed, also having a form of collective protectionism with respect to other countries. It also provides for the formation of a single customs territory.

Common Market

It arises when member countries can freely trade not only products, but all economic resources. This means that there is no barrier to trade services, goods, capital and labor. In addition, non-tariff barriers are reduced and eliminated.

Advantages and disadvantages of the formation of economic blocks

Advantages

Free trade within the bloc

The bloc’s members have free access to each other’s markets, allowing them to specialize not only regionally but also nationally.

Access to new markets

Easy access to the markets of other countries means that trade between them increases, allowing expensive local products to be replaced by cheaper imported ones.

Scale economics

It means reducing the cost of a unit of production according to the scale of production of a company. This benefits producers, thus resulting in lower costs.

Employment

As a result of increased trade, new jobs are created among member countries.

Protection

Firms within the bloc are protected from cheaper imports from abroad.

Disadvantages

loss of profit

Countries belonging to different economic blocs may lose out on the potential benefits of having free trade with each other.

trade distortion

This distortion in world trade arises when it stops trading with efficient producers that are outside the economic bloc.

Loss of sovereignty and independence

Countries must share economic sovereignty. Therefore, decisions need to be made for the entire area, which may go against the particular wishes of a country.

Possible detriment to local industry

Moving toward free trade tends to create winners and losers, thus hurting some domestic industries against lower-cost imports.

Retaliation

The development of a trading block stimulates the development of other blocks. This can lead to retaliation and business disputes.

Main economic blocks of the world

European Union

It is the most integrated trading block. The EU has free trade and also common regulations, being part of a customs union.

NAFTA/North American Free Trade Agreement (NAFTA)

North Atlantic Free Trade Agreement. Corresponds to the free trade area made up of Canada, the United States and Mexico

mercosur

It is the economic block of South America. It includes full members, such as Argentina, Brazil, Paraguay and Uruguay. In addition, it has associate members such as Bolivia, Chile, Colombia and Ecuador. It developed as a free trade zone and later became a customs union.

ASEAN Free Trade Area

Free trade zone in Southeast Asia. Includes Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand, Vietnam, Laos, Myanmar and Cambodia.

SAFTA

South Asian Free Trade Area, based on the Indian subcontinent. Includes Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.

african union

Economic block that contains 55 countries of the African continent, which was created to strengthen economic and political ties. It aspires to become a free trade zone.

References

WWG (2019). What is a Trading Block. Taken from: wwg.eu.com.
Diana Brand (1992). Regional bloc formation and world trade. Taken from: econstor.eu.
Economics Help (2020). Trading blocks – Pros and cons. Taken from: economicshelp.org.
Tutor2u (2020). What is a Trading Bloc? Taken from: tutor2u.net.
Prateek Agarwal (2020). Trading Block. Intelligent Economist. Taken from: intelligenteconomist.com.

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