Are the Advantages and Disadvantages of Trade Blocs

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Are the Advantages and Disadvantages of Trade Blocs

By | Feb. 2012
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A trade bloc is a type of inter-governmental agreement (also known as trade pact), often part of a regional inter-governmental organization, where regional barriers to trade, (such as tariffs and non-tariff barriers) are reduced or eliminated among the participating states. Advantages of Trading Blocs

The main advantages for members of trading blocs are as follows: 1) Free trade within the bloc: Knowing that they have free access to each other’s markets, members are encouraged to specialize. This means that at the regional level there is a wider application of the principle of comparative advantage. 2) Market access and trade creation: Easier access to each other's markets means that trade between members is likely to increase. Trade creation exists when free trade enables high cost domestic producers to be replaced by low cost, more efficient imports. Because low cost imports lead to lower priced imports, there is a 'consumption effect', with increased demand resulting from lower prices. 3) Economies of scale: Producers can benefit from the application of scale economies, which will lead to lower costs and lower prices for consumers. 4) Jobs: Jobs may be created as a consequence of increased trade between member economies. 5) Protection: Firms inside the bloc are protected from cheaper imports from outside, such as the protection of the EU shoe industry from cheap imports from China and Vietnam. Disadvantages of Trading Blocs

The main disadvantages for members of trading blocs are as follows: 1) Loss of benefits: The benefits of free trade between countries in different blocs are lost. 2) Distortion of trade: Trading blocs are likely to distort world trade and reduce and reduce the beneficial effects of specialization and the exploitation of comparative advantage. 3) Inefficiencies and trade diversion: Inefficient producers within the bloc can be protected from more efficient ones outside the bloc. For example, inefficient European...

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