A regional trading bloc (RTB) is a co-operative union or group of countries within a specific geographical boundary. RTB protects its member nations within that region from imports from the non-members. Trading blocs are a special type of economic integration. There are four types of trading blocs −
Preferential Trade Area − Preferential Trade Areas (PTAs), the first step towards making a full-fledged RTB, exist when countries of a particular geographical region agree to decrease or eliminate tariffs on selected goods and services imported from other members of the area.
Free Trade Area − Free Trade Areas (FTAs) are like PTAs but in FTAs, the participating countries agree to remove or reduce barriers to trade on all goods coming from the participating members.
Customs Union − A customs union has no tariff barriers between members, plus they agree to a common (unified) external tariff against non-members. Effectively, the members are allowed to negotiate as a single bloc with third parties, including other trading blocs, or with the WTO.
Common Market − A ‘common market’ is an exclusive economic integration. The member countries trade freely all types of economic resources – not just tangible goods. All barriers to trade in goods, services, capital, and labor are removed in common markets. In addition to tariffs, non-tariff barriers are also diminished or removed in common markets.
The advantages of having a Regional Trading Bloc are as follows −
Foreign Direct Investment − Foreign direct investment (FDI) surges in TRBs and it benefits the economies of participating nations.
Economies of Scale − The larger markets created results in lower costs due to mass manufacturing of products locally. These markets form economies of scale.
Competition − Trade blocs bring manufacturers from various economies, resulting in greater competition. The competition promotes efficiency within firms.
Trade Effects − As tariffs are removed, the cost of imports goes down. Demand changes and consumers become the king.
Market Efficiency − The increased consumption, the changes in demand, and a greater amount of products result in an efficient market.
The disadvantages of having a Regional Trading Bloc are as follows −
Regionalism − Trading blocs have bias in favor of their member countries. These economies establish tariffs and quotas that protect intra-regional trade from outside forces. Rather than following the World Trade Organization, regional trade bloc countries participate in regionalism.
Loss of Sovereignty − A trading bloc, particularly when it becomes a political union, leads to partial loss of sovereignty of the member nations.
Concessions − The RTB countries want to let non-member firms gain domestic market access only after levying taxes. Countries that join a trading bloc needs to make some concessions.
Interdependence − The countries of a bloc become interdependent on each other. A natural disaster, conflict, or revolution in one country may have adverse effect on the economies of all participants.