Trading Blocks: Formation and Review | International Trade

After reading this article you will learn about:- 1. Introduction to Trading Blocks 2. Formation of the Trading Blocks 3. Review of Selected Trading Blocks.

Introduction to Trading Blocks:

Geographical proximity and common interests are the two reasons for nations to come together and form a community having mutual respect and responsibility for each other’s interests. Geographical proximity is the major reason but common interest attracts countries not falling in GP area also to join the trading block.

Their policies are inward looking and not conducive to outsider, however for the outsider they present a unified market with focused segments. Their policy framework is not in conformity to the WTO agenda in the sense WTO advocates that each member country must give MFN status to all other member countries, whereas in the trading blocks the MFN status is reserved only for the members and not for the outsiders.

Despite this divergent attitude the trading blocks are powerhouse of the international trade. The trade within the block does have conductive and inductive reaction at or from other blocks. In the present interdependent world it is just not possible for any one block or country to remain in isolation for all its needs and aspirations.

The growth of the trading blocks has been phenomenal since 1950 onwards. According to the World bank survey, during the decade of fifties there were only 3 new blocks, but during the decade of nineties there were as many as 82 of them.

This growing popularity is a cause of concern for the Global Trading system that advocates non-discrimination against imports (and exports) for all the members. But there is a positive side to this situation. The trading block countries not only represent major part of the world but also account for the bulk of the global trade (APEC 45.3%, EU 35.5%, NAFTA 18.4% in 1998).

The facilities extended to each member are as per WTO requirements. Thus these trading blocks indirectly are popularizing the concept of WTO for unification of the world markets. The disturbing point against these trading blocks is their relationships with other such blocks and non-block countries.

The Geographical Blocks:

The geographical distribution of the countries normally leads to the formation of trading blocks and barriers. It must be understood that these countries themselves are in fact markets for each, their level only signifies the type of market that may exist or one that may be expected to exist. Countries with common interest tend to come closer to each other.

The common interest could be the culture, proximity, material needs, economic compulsions, common enemy or just the common or collective needs and aspirations for economic dominance and control over their area of existence.

Whatever be the compulsion the basic idea is always for promoting the interests of the member countries from a single platform against the countries out-side the area. The geographical proximity is the most powerful factor leading to the block formation tendency. The world as such has many G-B locks that gave birth to numerous trading blocks.

The general categorization of the world based on geographical logistics is as follows:

America:

Anglo America includes Canada, United States, Greenland, Bermuda, and St.Pierre Miquelone.

Latin America:

Caribbean, Mexico

Central America.

South America. Andreans group. Brazil, other South American nations.)

Europe: Western Europe:

France, Germany, Italy, Spain, UK and other members of the European community.

Eastern Europe:

Russia with its all 15 former republics.

Baltic States:

Sweden, Finland, Estonia, Poland

Africa:

Central, Eastern, Northern, Southern and Western Africa.

Asia:

Eastern Asia:

China, Japan, South-Korea

South Asia India, Pakistan

South East Asia:

Malaysia, Philippines, Indonesia, Singapore, Thailand and Vietnam.

South West Asia:

Iran, Iraq, and other Middle East countries

Oceania:

Australia and other Pacific Ocean islands.

Each geographical block has a mixture of different levels of countries. European block has the maximum concentration of developed nations. Africa and Asia has mixed concentration of the least developed countries and highly developed countries.

The cause of this disparity has links with the colonial era when they were the subjects and source of raw materials. The times have changed now the countries are coming together to serve their common interest with the result numerous groups and associations have been formed world over.

Formation of the Trading Blocks:

It is human tendency to form closed groups amongst themselves for mutual benefits, the countries are nothing but collection of societies comprising of groups of families and the ultimate unit the individual, a human, and they do form groups.

This tendency leads to the formation of various regional groups of countries with common interest. That is how the trade blocks were formed. The basic intention was to increase the inter block trade under most favoured nation’s treatment to each member by every member. Such groups of countries increased their collective bargaining power especially against the countries outside the block.

As a matter of fact this tendency helped both, the countries within the group and those outside intending to do business with the group countries. These groups offer extended market with uniform laws concentrated and focused bureaucracy.

Some of these trade blocks with member countries are as follows:

1. ASEAN:

Association of South-East Asian Nations:

Members:

Brunei, Darusselam, Indonesia, The Lao People’s Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, Cambodia and Vietnam.

2. APEC:

Asia Pacific Economic Cooperation:

Members:

Australia, Brunei, Darusselam, Canada, Chile, China, Indonesia, Japan, The Republic of Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, The Russian Federation, Singapore, Taiwan, Thailand, USA and Vietnam.

3. Bangkok Agreement:

Agreement on Trade Negotiations among Developing Member Countries of the Economic and Social Commission for Asia and the Pacific:

Members:

Bangladesh, India, the Republic of Korea, The Lao People’s Democratic Republic, Philippines, Sri Lanka and Thailand.

4. CEMAC:

Economic and Monetary Community of Central Africa:

Members:

Cameroon, The Central African Republic, Chad, The Republic of Congo, Equatorial Guinea, Gabon.

5. CEPGL:

Economic Community of the Great Lakes Countries:

Members:

Burundi, The Democratic Republic of Congo and Rwanda.

6. COMESA:

Common Market for Eastern and Southern Africa:

Members:

Angola, Burundi, Comoros, The Democratic Republic of Congo, Djibouti, The Arab Republic of Egypt, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Andrea, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Tanzania, Zambia and Zimbabwe.

7. CARICOM:

Caribbean Community and Common Market:

Members:

Antigua & Barbuda, Bahamas, Barbados, Belize, Dominica, Geranda, Jamaica, St. Kitt & Nevis, St. Lucia, St. Vincent and the Grenadines.

8. CACM:

Central American Common Market:

Members:

Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua

9. ECCAS:

Economic Community of Central African States:

Members:

Angola, Burundi, Cameroon, The Central African Republic, Chad, The Democratic Republic of Congo, Equatorial Guinea, Gabon, Rwanda, and Sao Tome and Prince.

10. ECO:

Economic Cooperation Organization:

Members:

Afghanistan, Azerbaijan, The Islamic Republic of Iran, Kazakhstan, Kyrgyz Republic, Pakistan, Tajikistan, Turkey, Turkmenistan and Uzbekistan.

11. OECS:

Organization of Eastern Caribbean States:

Members:

Antigua & Barbuda, Dominica, Grenada, Montserrat, St Kitts & Nevis, St. Lucia, St. Vincent and the Grenadines.

12. MRU:

Mano River Union:

Members:

Guinea, Liberia and Sierra Leone.

13. ECOWAS:

Economic Community of West African States:

Members:

Benin, Burkina Faso, Cape Verde, Cote D’lvoire, The Gambia, Ghana, Guinea, Guinea Bassau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone and Togo.

14. EU:

European Union:

Members:

Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the United Kingdom.

15. GCC:

Gulf Cooperation Council:

Members:

Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates.

16. LAIA:

Latin American Integration Association:

Members:

Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and the Republica Bolivariana De Venezuela.

17. SADC:

Southern African Development Community:

Members:

Angola, Botswana, Lesotho, Malawi, Mauritania, Mozambique, Namibia, Swaziland, South Africa, Tanzania, Zambia and Zimbabwe.

18. LAS:

League of Arab States:

19. MERCOSUR:

Southern Common Market:

Members:

Argentine, Brazil, Paraguay and Uruguay.

20. NAFTA:

North American Free Trade Agreement:

Members:

Canada, Mexico and USA.

21. SAARC:

South Asian Association for Regional Cooperation:

Members:

Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

22. UEMOA:

West African Economic and Monetary Union:

Members:

Benin, Burkina Faso, Cote D’lvoire, Guinea Bassau, Mali, Niger, Senegal, and Togo.

Associations and Commissions:

There are cases when the common product forces the countries to unite and form a block which is better known as the “Association or the Commission.” In this case the G- Proximity is not essential but the common interest of a particular commodity is the deriving force uniting nations of diversified G- Block to unite and form an association or commission to promote the global trade in the specific commodity.

They differ from the trading blocks on three main counts:

Common link is a commodity

The purpose is to promote global sale for better returns

To advise member countries for better production and distribution methods

Product based associations and councils issue guidelines and each member country acts individually for the conduct of trade.

Some of the associations are:

1. AGC.:

African Groundnut Council.

2. APCC:

Asian & Pacific Coconut Community.

3. APEF:

Association of Iron Ore Exporting Countries.

4. ANRPC:

Association of Natural Rubber Producing Countries.

5. CIPEC:

Council Inter Governmental Des Pays Exportateurs Du Cuivre or Intergovernmental Council of Copper Exporting Countries

6. IBA:

International Bauxite Association

7. ICAC:

International Cotton Advisory Committee.

8. ISO:

International Sugar Organization.

9. ITPA:

International Tea Promotion Association.

10. OPEC:

Organization of Petroleum Producing Countries.

Above are just a few of the international bodies that deal with not only the regional matters but also the commodities that have interest amongst the various producing and consuming countries. Each interacting country knows individual limits and by joining hand they just extend limits, the risk of one gets diluted to all others and demand of one is opportunities for others.

Review of Selected Trading Blocks:

1. Association of South East Asian Nations (ASEAN):

Established on 8th August 1967 in Bangkok.

Members:

Brunei, Darusselam, Indonesia, The Lao People’s Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, Cambodia and Vietnam.

Dialogue Partners:

Australia, Canada, China, EU, India, Japan, Korea, New Zealand, Russia and USA.

Objectives:

To accelerate economic growth, social progress and cultural development in the region through joint endeavours in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of South-East Asian nations.

To promote regional peace and stability through abiding respect for justice and the rule of law on the relationship among countries of the region and adherence to the principles of the United Nations’ Charter.

To promote active collaboration and mutual assistance on matters of common interest in the economic, social, cultural, technical, scientific, and administrative fields.

To provide assistance to each other in the form of training and research facilities in the educational, professional, technical, and administrative spheres.

To collaborate more effectively for the greater utilization of their agriculture and industries, expansion of trade and including the study of the problems of international commodity trade, improvement of transport and communication facilities, and raising the living standards of their people.

To promote South-East Asian regional studies.

To maintain closer and beneficial cooperation with the existing international and regional organizations with similar aims and purpose, and explore all avenues for even closer cooperation among themselves.

Performance:

Exports within the block:

1970: 1.36 Billion US $.

1980: 12.24 Billion US $

1990: 27.20 Billion US $

1998: 87.76 Billion US S

Exports within the block as % of total exports:

1970: 22.3 %

1980: 17.2%

1990: 18.9 %

1998: 20.4 %

Total exports as % of world trade:

1970: 2.2 %

1980: 3.9 %

1990: 4.3 %

1998: 6.1 %

2. Asia Pacific Economic Cooperation (APEC):

APEC was established in 1989.

Members:

Australia. Brunei, Darusselam, Canada, Chile, China, Indonesia, Japan, The Republic of Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, The Russian Federation, Singapore, Taiwan, Thailand, USA and Vietnam.

APEC Secretariat is located in Singapore which provides the central link and core support mechanism for all APEC activities. It began as an informal dialogue group but grew up to become the primary regional vehicle for promoting open trade and economic cooperation.

Its aim is to advance Asia -Pacific community into a powerful economic force in the world. In 1994 it translated its vision of an open trading system into a very ambitious goal of free and open trade and investment in the Asia – Pacific region by the year 2010 for developed member economy.

It is achieving its goal through trade and investment liberalization, business facilities, and economic and technical cooperation. The members also cooperate with each other on education, energy, environment, finance, human resources, small and medium enterprises, telecommunication and information technology, and transport.

It has three committees, a sub-committee, nine working groups, an ad-hoc policy level group, and a technical expert group. The committee on trade and investment aims to create a perspective on trade and investment issues and to pursue liberalization and facilitation initiatives. The budget and management committee advises the senior officials on budgetary, administrative and managerial issues.

Performance:

Despite the financial instability in 1997-98 this region remained one of the fastest growing regions in the world. It had Gross Domestic Product of over 16 trillion US $ and account for 43 % of the global trade.

A. Exports within the block:

1970: 57.61 Billion US $

1980: 37.77 Billion US $

1990: 90.16 Billion US $

1998: 1,736.9 Billion US $

B. Exports within the block as % of total exports:

1970: 57.9 %

1980: 57.9 %

1990: 68.5 %

1998: 69.7 %

C. Total exports as % of world trade:

1970: 35.3 %

1980: 33.7 %

1990: 38.9 %

1998: 45.3 %

3. South Asian Association for Regional Cooperation (SAARC):

Established on 8th December 1985 in Dhaka, Bangladesh.

Members:

Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

This association was formed primarily to strengthen the South Asian nations for working together and finding solutions to their economic problems and social development in the member states through joint action on the basis of sovereign equality, territorial integrity, political independence, non-interference in each other’s’ internal affairs.

The main objectives are:

1. To promote welfare of the people of the South Asian region.

2. Accelerate economic growth, social progress, and cultural development.

3. Promote and strengthen collective reliance among the member countries.

4. Contribute to mutual trust, understanding, and aspiration of one another’s problems.

5. Promote active collaboration and mutual assistance in economic, social, cultural, technical, and scientific fields.

6. To strengthen cooperation with other developing countries.

7. Strengthen cooperation among themselves in international forums on matters of common interest.

8. Cooperation with international and regional organizations with similar aims and purposes.

Performance:

Exports within the block:

1970: 0.99 Billion US $

1980: 0.66 Billion US $

1990: 0.85 Billion US $

1998: 2.86 Billion US $

Exports within the block as % of total exports:

1970: 3.2 %

1980: 5.2 %

1990: 3.2 %

1998: 5.3 %

Total exports as % of world trade:

1970: 1.1%

1980: 0.7 %

1990: 0.8 %

1998: 1.0%

North American Free Trade Agreement (NAFTA):

Members:

USA, CANADA AND MEXICO

NAFTA is a trade and investment agreement between USA, Canada, and Mexico with the purpose of reduction of trade barriers and for free-flow of goods and services among these three countries. The agreement covers goods and services that are produced only in North America.

For imported goods/ services they must contain a specific act of local components for qualifying the legal requirements for entry in to NAFTA. The most important thing about this agreement is that it does not specify nationality or country of ownership.

This provision has proved extremely beneficial to the Japanese car manufacturers who set up plants in this region for sales and export from here to overseas markets. The agreement covers tariff reduction over 10 year period, free movement of professions, financial and direct investment, and protection of natural environments and labour from exploitation.

Objectives:

1. Tariff reduction leading to elimination.

2. Access to financial services including banking.

3. Protection for investment.

4. Facilities for speedy trucking between the three countries.

5. To detect and take remedial actions against environmental cases.

6. Protection of worker’s interests who suffered due to NAFTA agreement.

7. To create North American Development Bank with 4 Billion US $ capital to assist in environmental cleanup and to provide trade adjustment assistance to communities adversely affected by NAFTA.

A. Exports within the block:

1970: 22.08 Billion US $

1980: 1102.22 Billion US $

1990: 26.27 Billion US $

1998: 521.65 Billion US $

B. Exports within the block as % of total exports:

1970: 36.0 %

1980: 33.6 %

1990: 41.4 %

1998: 51.7 %

C. Total exports as % of world trade:

1970: 21.7 %

1980: 16.6 %

1990: 16.2 %

1998: 18.4 %

European Union:

Established: 1951 (Beginning of the European Unification)

France, Germany, Italy, Belgium, Holland and Luxembourg started the original movement in 1951. This is a treaty establishing a single council of ministers, and a single commission of the European Communities comprising of European Coal and Steel Community (ECSC), the European Economic Community (EEC), and the European Atomic Energy Community (EURATOM).

The three communities were legally separate having established by separate treaties but they shared central common institutions. In 1967 the three communities joined to form European Community (EC). For promoting closer relations among the people of Europe and to establish a common market by eliminating trade barriers.

The formation of the rules and regulations was also initiated during this time and a new word was coined for the officials of the bureaucracy to run the show as “Eurocrates”. The organization at time consisted of the European Commission, the Council of Ministers, the European Parliament, and the European Court of Justice. UK, Denmark and Ireland joined EC in 1972.

Greece in 1981, and Spain and Portugal in 1986. The European Monetary system was adopted in 1979 to control the currency fluctuation and inflation. By 1985 the EC members adopted resolution for single European market, the act was ratified by the parliament on 1st Jan 1986.

The foundation of this union was laid on four principles (Mutual recognition, setting no priorities but time table for action, a Bottom-Up approach to policy formation and implementation, and qualified majority).

These are basically responsible for the tight unification of the European people and respective governments into a single unit of common union. In 1991 EC was renamed as European Union, a common central bank and a common currency was created. The strength of the union was tested by the severe recession of 1992-93. As of date this union is one of the most powerful body in the international trade and commerce.

Members:

Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom.

Performance:

A. Exports within the block:

1970: 76.45 Billion US $

1980: 45.69 Billion US $

1990: 98.13 Billion US $

1998: 1076.5 Billion US $

B. Exports within the block as % of total exports:

1970: 59.5 %

1980: 60.8 %

1990: 65.94 %

1998: 55.2 %

D. Total exports as % of world trade:

1970: 45.6%

1980: 41.0 %

1990: 44.1 %

1998: 35.1 %