Regional Trading Blocs

What are Regional Trading Blocs?

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.

Regional Trading Blocs – Advantages

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.

Regional Trading Blocs – Disadvantages

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.