International Business Economics

An economic bloc can be defined as a group of countries with a common interest, cultural background and are intertwined economically. There are generally three economic blocs that include North America, Europe and Asia. The North America includes United States of America, Mexico and Canada. The Europe bloc consists of Britain, Germany, and France. Finally, the Asian bloc consists of Korea, Hong Kong, Malaysia among others.

The  current major economic blocs across the world are the Association of Southeast Asian Nations (ASEAN) , Common Market of the South North A European Union MERCOSUR), North American Free Trade Agreement (NAFTA), Asia Pacific Corporation Forum (APEC), Central American Common Market, Economic Community of West African States (ECOWAS) and the Economic Community of Central African States (CEEAC).

Activities of economic blocs have both economic and political implications. The European Union for example, which is the largest trading bloc, has considered political reasons more important as compared to economic reasons sought by other economic organizations. The main reason for the formation of European Union was international stability of the member states that was in line with expansion of communism in Europe around 1989. Joint policies have been put in place as regards citizenship and military defence.

Currently debates have been going on whether to the trade blocs are beneficial. Some analysts argue that these trade blocs will lead to “the end of Geography” with the formation of regions which according to them will as well threaten trade because of the protectionist policies imposed on them.  They also add that the desired welfare expected by the member states may not be achieved. However, some analysts argue that the blocs are important because they promote trade that is globalized.

Advantages of economic blocs

Economic blocs assist member countries to expand the size of market in which they can sell to. As regards economies of scale, this is very important. Generally, small countries lack sufficient market in order to enjoy economies of scale. This is because the small size of market does not give room for large-scale production. In Europe for example, the formation of EU has greatly helped the small member countries that used to service only the domestic markets. Reports show that European Union’s estimates that the economies of scale enjoyed will lead to 3% increase for European production.

Members of an economic bloc obtain access that is preferred to the markets of the signatory members. This however depends on the arrangement’s impact and some other policies which are concurrent. Rules must also be set to regulate the trade and other activities of the member states like the trade barriers removal. Agreements for rules that bring advantage to the member countries can also be arrived at and this helps reduce irritants and poor restrictions.

Economic blocs provide security to the member countries against any hazards which may occur in future. These include trade wars, protectionism, macroeconomic instability and poor terms of trade. ECOWAS can be a good example of ‘insurance’ in this case where by there is enough oil in Nigeria as well as in the member countries. However between developing nations, the issue of insurance should not be a priority when entering into such arrangements.

By joining the economic blocs, there is increased coordination and increased bargaining power. This is so because the approach here is the give, and take approach and it helps to make the tradeoffs’ policy possible. For example, the World Trade Organization (WTO) has strong bargaining power because they are able to coordinate their negotiation positions well. This bargaining power helps especially the poor countries since it is easier to bargain as a group other than as an individual country. Better negotiation terms are therefore achieved.

            The increased market size helps diminish the individual firms’ market power. The large market brings about competition and when the domestic firms are faced by competition, the monopoly power ceases to exist. This serves as an incentive to increase firms’ productivity, for example through improved management and use of advanced technology. Investment is yet another possibility where capital endowment is different for the member countries. This invested capital will yield the highest return.

Economic blocs have significantly helped in rural development and eradication of poverty.  The Association of Southeast Asian Nations (ASEAN) encourages introduction of ICT in rural and undeveloped areas. ASEAN has Cambodia. Laos and Myanmar as member states and yet these states are considered by the United Nations as poor. On the other hand, the economic bloc has some members who are considered very developed by the United Nations. These include among others, Brunei and Singapore. One of the main goals of the bloc is poverty reduction while bringing full development (Anne, 1997, p.66).

            Economic blocs boost security among member states. This leads to increased trade and investment that is important in international trade. Interdependency and positive interactions are achieved as well. Once trust is build, there is increased opportunity cost of war and reduced conflicts among the member states. Due to the common interest, increased cooperation is also achieved and this boosts the international security. This may as well lead to common defence or assistance in military leading to security globally.

            Agriculture for member states is boosted through economic blocs. Both the importing and the exporting countries benefit in such agreements. Canada is a good example of the countries which agricultural sector has been improved through economic blocs.  The country, under the NAFTA, enjoys the reduced protection for its less efficient agricultural sectors through accessing

The Southern Cone Common Market (MERCOSUR), an association of Brazil, Argentina, Paraguay and Uruguay Was created to boost economic growth and common interests. The economic bloc, though smaller in strength than NAFTA, has increased public concern and interest. Analysts speculate that the bloc which was an initiative to increase investment and to reduce debt in Latin America will be the first key step to link almost the North and South America economies.

Another possible gain is the possibility of increased business investment opportunities. Expansion of the market through the trade blocs can attract direct foreign investment to the signatory members. Global firms usually bring with them improved technology, new marketing strategies and better management practices. If this diffusion takes place, then the local countries in the bloc get extra benefit from such investments with foreign firms. The return on investment is also increased by the new profit opportunities that as a result expand the overall production of the member countries.

Trading economies in the economic bloc are able to enjoy benefits through increased exports and imports. Another benefit is that since countries have different production capabilities, the new access to raw materials from the emmer countries becomes of much benefit. There is also development in technology as well is education to the workforce which are all of great benefit to the individual countries in product and service development. Countries are also given a chance to concentrate on what they produce best. This specialization leads to mass production while at the same time they are able to acquire what they don’t produce at favourable prices due to lack of tariffs.

Through economic blocs, liberalization of the member states is made faster and deeper. This is through addressing trade barriers which are more complex, varied and which are not more transparent. Elements that are beyond the standard trade policy are also considered in economic blocs. These include capital market and labour. This signifies that the number of reachable agreements is determined by the number of negotiating participants.

Economic blocs help to increase the scale of production. The expanded scale of production leads to lower costs involved in the process of production.  Before the formation of the bloc, the firm’s size is limited to the national market and therefore the firm may not be large enough to make use of economies of scale. However when the firms are joined in the economic bloc, each firm now gets a larger market to sell its products. Some other firms take advantage of the increased market size to expand their size. Other firms however do not gain the scale of economies fast enough and they may end up being disappearing.

Disadvantages of Economic Blocs

The increase of economic blocs has caused a lot of concern to some people. The Congregational budget reported that economic blocs could divert the economies to rivalry trading blocs from the intended multilateral negotiations. Other disadvantages of this type of trade include exploitation of the less developed nations by the developed and industrialized countries. There could also be a problem of transfer of labour from the developed countries to the developing countries. Another concern is political influence by the stronger member countries which could in turn affect the negotiation processes of the trading partners.

North American Free Trade Area (NAFTA) has been criticized by some economists. They argue that the economic bloc is unfair to corporations and workers. This is because, according to them the workers have been forced into direct competition yet they are being assured less protection and fewer rights. They say that the signatory countries should raise both the standards of labor and the environment. Another concern that has been raised is that with the implementation of NAFTA, U.S trade deficit has widened and that some workers have been forced to work in low paying jobs.

Economic blocs are discriminatory in nature in that they are only favourable to member countries. This means that they violate the rule of MFN which states that all countries under WTO should get the most favorable trade policy offered by any country. However blocs benefit some industries while harming other industries. For example, countries like Australia and Chile that have signed agreements with the US are allowed to bring their products to the US market freely without paying tariffs for a considerable long time. On the other hand, exporters from China, Pakistan and others from outside the bloc cannot sell their products to the US without paying the necessary tariffs.

             Economic blocs can cause trade diversion. This occurs when imports of low cost from a non-member country are not allowed to enter the preferential trade area by barriers either tariff or non tariff and are replaced by imports from member countries which are of high cost. This reduces the economic well being of the world since production is shifted from efficient producers to less efficient producers. The allocation of resources internationally therefore becomes less efficient and as a result, production ceases to follow the comparative advantage pattern.

Retaliation is yet another disadvantage of economic blocs. This happens when the blocs stimulate development of others. This usually leads to disputes in trade. Such disputes have been witnessed recently between NAFTA and EU where the EU airbus was booed. Another dispute is the US steel tariffs dispute which in 2005, was declared illegal by the WTO. Also in response to the ban on hormone treated beef from EU, US imposed a tariff of sixty million pounds on the product. Such trade disputes are not healthy at all and should be avoided in the best way possible. Disputes can also be witnessed among member and non-member states. For example, MERCOSUR’s intention to block FTAA and its lack of interest in trading with US has led to bad relations between the two. Washington is viewing the bloc as an obstruction for it to trade with Latin America.

If now well negotiated, economic blocs may not confer the economic advantages significant to trading partners. Complexity of international system of trading is also made complex and can raise costs of transactions. For example, rules that are very complicated are put in place to prevent products from non-member states from entering the market. Compliance with the agreement’s rules can also become a hard task. The negotiation of economic blocs can be an opportunity cost being a resource incentive. For example, the NAFTA was over a thousand pages and required over 24 committees as well as working groups.

African economic blocs are created mainly for political reasons, rather than economic reasons. The blocs may reduce the members’ welfare especially if the rest of the world is the marginal supplier. Due to income levels divergence, the poor members of the bloc may end up losing even though the aggregate welfare is raised. The blocs can also cause tension among member countries. Questions are therefore being raised on the economic benefit of joining trade agreements.

Trade blocs at times have very high expectations that are never achieved. For example, since the introduction of NAFTA, some problems have been arising. A major problem is on the agreement of the Caribbean basin initiative. When the initiative was adopted, there were great promises to the Caribbean economies that have not lived to the initial expectation. It is only Jamaica that has succeeded in becoming an export platform for industrial products and clothing for the US market.

Through economic blocs, member countries have been unable to compare prices of goods, resources and services accurately. This is common across the European Union. The reason for this is distorting effects of rates of exchange that are different. This definitely discourages trade. When we follow the economic theory, resources should be allocated in terms of their prices in order to improve economic efficiency.

The economic blocs comprise of both the rich and the poor countries. The blocs ignore the fact that the area that is growing fast in the whole world is the service sector. Concentration has been put by the rich countries on financial services and the businesses. However, the poor countries mainly benefit from tourism and travel services which are being given little concentration by the rich member countries. Services like telecommunication and public transport continue being sold to the poor countries by the rich countries.

Trade blocs also face a problem when it comes to decision making on certain agreements.  MERCOSUR for example, as experts say, has recently become paralyzed, with the member states divided on the future of the organization. The main interest of the trade bloc has been to eliminate obstacles that affect regional trade, like income inequalities, high tariffs and technical conflict which act as a barrier to the success of the organization. Brazil for example, which is a member to MERCOSUR, insists that the organization should remain focused on expanding regional trade. On the other hand, Venezuela wants the organization to focus on political affairs. Although Venezuela is yet to acquire full membership in the trade bloc, this issue has greatly affected the affairs of MERCOSUR.

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