Economic Blocs and Free Trade Area Agreements - Essay Example

Essay Topic No. 4 In relation to regional economic integration, are economic blocs and free trade agreements building blocs or stumbling blocs as far as liberalized trade is concerned? Student Name: Student Number: Unit: Unit Coordinator: Assignment: Due Date: Word Count: 1567 Introduction Regional economic integration is important for multilateral relation and liberalization of trade. Regional Trading Agreements (RTAs) are constantly increasing and will become a common feature of international trade in future. Economic blocs are important for increase of liberalization of trade and removal of trade barriers. Most countries in the world are involved in Trading Agreements. It is essential to examine whether trading blocs which have been existence since 1980s are a stumbling block or favour multilateral in relation in trade. Most of the countries which had relied on the multilateral system are steadily joining regional agreements in order to promote trade. Saggi (2006) explains that Regional Trade Agreements are groupings of countries which have been formed with the aim of eradicating barriers in trading with member states. The agreements may exist between countries that do not necessarily belong to the same geographical region. Regional Trading Agreements can be categorized into Free Trade Agreements (FTAs), Preferential Trade Agreements (PTAs), Common Markets, Customs Unions (CUs) and Economic Unions. A trade bloc is Preferential Trade Agreement among a group of countries which is intended to reduce or eliminate barriers to trade among the member countries. The formation of the European Economic Community was the first wave of PTA’s. Many developing countries tried to replicate the EEC initiative in trying to come up with a several PTAs. Their move did not succeed because the principles that led to the formation of EEC were different from them. PTAs are responsible for increase of trade because they lead to addition of new members or enhance multilateral trade negotiations. In this regard, trading blocs act as building blocs towards increased multilateral trade due to reduced barriers of trade (Trotignon, 2009, p.2). Members of the EEC find it easy to trade among themselves and many more members have been added to the trading bloc and therefore enhancing trade among the member states. PTAs have two main features: it indicates elimination or reduction of barriers to trade, and the trade liberalization is normally discriminatory. This is more beneficial to member countries that any other person outside the trading bloc. Countries that are found outside the trading bloc find barriers when trading with members who belong to the trading bloc. Trading blocs can consist of deeper forms of integration as observed by Stoyanov (2009), p.45. They enhance international competition, investment, movement of capital and labour and adjustment to international trade laws. Economic analysis emphasize the overall impact of regional integration without highlighting distributional or transfer consequences which are usually important in determination of political sustainability. Transfer comes into being because members of the trading bloc have removed tariffs between them while the cost of imports on the other hand increases. This can be vividly recalled in the recent Global Economic Crisis where members of same trading bloc have been affected adversely with the same events or challenges (Baldwin & Wyplosz, 2003). Spain, Turkey, and Poland in Europe have been adversely affected by the economic meltdown forcing their respective governments to seek for bail out plans from other countries. The transfer effect means that both negative and positive consequences are transmitted. Countries in the same economic bloc or regional trade agreement have a high risk of experiencing the same problem across the member countries. The European Union went ahead to come up with the Euro as a common currency among the member countries (Virag-Neumann, 2009, p.385). Many of them have not accepted to lose their home currency to the Euro. The level of trade barriers in trade agreements or economic blocs are reduced as compared to those who are not members. In trading agreement or economic bloc, incentive to protect is common. This means that the greater the group, the greater the collective monopoly power it wields, and consequently the greater the optimal tariff it can profitably be in charge of. Seidmann (2009) concedes that in a global world having few but large blocs, every unit will possess greater monopoly power and hence try to change the terms of trade in its favour through raising tariffs against other established blocs. Hence the blocs result into reduction terms of trade and only succeed to reduce everybody’s warfare. This results in classic tariff war. The tariff war can be avoided when there are many small trading blocs in the world. Larger groups result into a disadvantage. Regional integration has proved to be difficult through trading blocs in developing countries. This occurs owing to low degree of economic integration in terms of trade relations. Political reasons have played a key role in causing the trading blocs not to be sustainable. Economic reasons also make it hard for regional integration to occur (Ornelas, 2008, p.223). Politically, the inability of these agreements to take shape is traced from absence of commitment in implementing or adhering to programs intended for regional trade liberalization and the tendency of member countries to put national goals ahead regional ones. For many countries that had just attained independence, surrendering economic sovereignty was a sacrifice that had not prepared themselves to make. During the implementation of liberalized programs many governments in the developing world decided to use restrictive and unilateral trade measure when increase in import caused pressure necessitating domestic adjustment. Challenges in adjustment led to conflict among partners in regard to distribution of the benefits and cost to regional integration (Walmsley, & Winters, 2005, p.697). The ineffective nature of trade agreements in developing countries have been attributed to several factors that include disparities in initial conditions like different degrees of income and divergent rates when it comes to industrial development hence making the benefit from trade unequal. Secondly, low levels of fundamental integration was typical of many groupings, macroeconomic imbalances and inward-oriented industrial policies made adjustment to mutual integration and adjustment to domestic integration very challenging (Baldwin & Wyplosz, 2003). Trading blocs to many developing countries have not been building blocs and instead they have reinforced the differences that existed between the member countries. Political affiliation is important when it comes to regional trading blocs. Isolated countries feel left out and look for alternative ways of looking for recognition or partnership. Development approach to integration regionally in developing countries has been highly criticized in the trade diversification framework. In this regard, the greater the share of third country imports in total imports, the higher the tariff revenue loss following the formation of a regional trading bloc. Trade partners that hitherto had higher tariffs lose a lot in the event of a regional trading bloc formation since more tariff revenue is normally redistributed away from the region that is formed (Vicard, 2009). The loss in regard to diversification is high with also a high probability that not only member partners but also the entire regional trading agreement will end up losing. Consequently the failure of regional trading blocs in many developing groupings of countries is expected. Members which are less industrialized or developed subsidize the inefficient industry of their more developed counterparts and are not compensated since the wealth of other members could not permit transfers of extensive income. In developed countries, regional integration in trade has been enhanced by the trade free trade building blocs and economic blocs. In principle regional trading agreements can result into net trade diversion or net trade creation. It should be noted that participation in any RTA is entirely a decision that is political. Some agreements can be formed based on objectives of governments. If governments were only interested in national welfare in their countries, there will be no any reason for worry. This could only involve welfare-improving and trade creation (Wild & Wild, 2012). However, governments possess other motivations which are driven by special interest groups. Governments that are directed by special interest groups will come up with trade-diverting RTAs. When there are two small economies considering evaluating any possibility of Free Trade Area (FTA), the governments will look at the impact of the agreement on its common voter while being directed by the domestic industry via campaign contributions (Freund & Ornelas, 2010, p.7). FTA promotes increased protection when producers from the member with the low-(external) will be able to export its entire output to member with high-tariff without affecting prices. Producers in country with high-tariff are not hurt whereas producers from a country with low-tariff enjoy greater protection rents. Governments which are greatly susceptible to special interest groups will look at most agreements that are trade-diverting. Conclusion Free trade agreements and economic blocs can either be both stumbling blocs and building blocs in regard to regional economic integration. As examined, the level of economic development and the interest of the individual governments in the formation of these trading blocs will determine their failure or success. Where economic development in individual countries is at the same level and there are no huge differences in many things, free trade areas and economic blocs work very well and become a success as the case of European Union and Asian Pacific Economic Community (APEC). Where there are huge differences in economy and industrial development of individual member state, economic blocs and free trade agreements have not fared on well. Political affiliations of governments have interfered to great extent in multilateral relations. Largely, economic blocs and free trade agreements have acted as building blocs in regard to regional economic integration. Economic integration has been enhanced. Liberalization of trade has been enhanced in these trading blocs. References Baldwin, R.E. & Wyplosz, C. (2003), The Economics of European Integration, McGraw-Hill, London. Ornelas, E. (2008). Feasible multilateralism and effects of regionalism. J. Int. Econ. 74: 202-24. Freund, C. & Ornelas, E., (2010) Regional Trade Agreement, Research Working Paper 5514, The World Bank Development Research Group. Saggi, K. (2006). Preferential trade agreements and multilateral tariff cooperation. Int. Econ. Rev. 47: 29-58. Seidmann, D. (2009). Preferential trading arrangements as strategic positioning. J. Int. Econ. 79: 143-59. Stoyanov A. (2009). Trade policy of free trade agreement in the presence of foreign lobbying, J. Int. Econ. 77: 37-49. Trotignon, J. (2009) Are the new trading blocs building or stumbling blocks? Working Paper 09-33. Vicard, V. (2009). Trade, conflicts and political integration: explaining the heterogeneity of regional trade agreements, Work. Pap., Paris School of Economics-University Paris 1 Panthe on-Sorbonne. Virag-Neumann, I. (2009). Regional Trade Agreements and the WTO, Department of Applied Economic, University of Pannonia, Budapest, Hungry. Walmsley, TL, & Winters, LA. (2005) Relaxing the restrictions on the temporary movement of natural persons: a simulation analysis, J. Econ. Integr. 20: 688-726. Wild, J., & Wild, K. (2012). International business: The challenges of globalization (6th ed.). New Jersey: Pearson. Read More