Debates about Trade

Does trade globalization increase economic growth? Does globalization reduce poverty? Explore the Debates about Trade and Development

The role and function of regional trade blocs

What are regional trading blocs?

Regional trade blocs are intergovernmental associations that manage and promote trade activities for specific regions of the world.

Trade bloc activities have political as well as economic implications. For example, the European Union, the world’s largest trading block, has “harbored political ambitions extending far beyond the free trading arrangements sought by other multistage regional economic organizations“ (Gibb and Michalak 1994: 75). Indeed, the ideological foundations that gave birth to the EU were based on ensuring development and maintaining international stability, i.e., the containment of communist expansion in post World War II Europe (Hunt 1989). The Maastricht Treaty which gave birth to the EU in 1992 included considerations for joint policies in regard to military defense and citizenship.

The decisions reached by development policy makers on whether regionalism or globalized trade should be pursued may influence a country’s earnings from trade.

Regionalism differs from globalization in the size and area of markets. From the perspective of developing countries skeptical of free trade, regional trade blocs offer some form of protection against an aggressive global market.

Four major trade blocs

Some well known trading blocs include the EU (European Union; see Map 1), NAFTA (North American Free Trade Agreement; see Map 2), MERCOSUR (Mercado Comun del Cono Sur, also known as Southern Common Markets (SCCM); see Map 3), and ASEAN (Association of Southeast Asian Nations; see Map 4). The following maps show trade data for 2001 (UNCTAD 2002). The series of pie charts display the export composition of trade from each country in the bloc.

General debates on trade blocs

The debates surrounding the feasibility of regionalism contain sharp disagreements. Gibb and Michalak note, “the multilateral trading system is in decline and regionalism is on the ascendancy” (Gibb and Michalak 1994: 1). Although scholars such as O’Brien (1992) and Hopkinson (1992) argue that globalization may usher in the “end of geography”, regionalism has emerged as an alternative form of trade that attempts to counter more aggressive policies of free trade, especially as espoused by the WTO.

Some analysts such as Preeg (1989) argue that trade blocs are desirable because they complement globalized trade. Others view regionalism as a threat to free trade because trade blocs advocate and install protectionist policies that shield bloc members from the effects of free trade (Schott 1989). However, Gibb and Michalak remind us that “theoretical analysis based on liberal economic principles is…inconclusive in evaluating the impact of trading blocs on living standards, redistribution of income and welfare” (1994: 32). Furthermore, they note, “no overall consensus is likely to be reached in the foreseeable future…[and] preferential trading arrangements may or may not bring welfare gains for participating counties” (1994: 33).

Regardless of the position taken on regionalism, the fact is very few countries develop and reduce inequality via regional trade alone. This is primarily due to the size of the market: globalization taps into a world market whereas trade blocs emphasize into regional markets, which are larger than the domestic market of a given country, but still smaller than the world market.

Trade blocs have a range of reasons to “protect” the trade interests of their region:
(1) To establish some form of regional control regarding trade that fulfills the interests of nations within that region;
(2) To establish tariffs that protect intra-regional trade from “outside” forces;
(3) To promote regional security and political concerns or to develop trade in such as way as to enhance the security in the region;
(4) To promote South-to-South trade, e.g., between Africa and Asia, and between Latin American countries;
(5) To promote economic and technical cooperation among developing countries (Malaysiaexports.com);

They also use several measures to restrain global competition:
(1) import quotas (limiting the amount of imports into the country so that domestic consumers buy products made by their countries in their region);
(2) customs delays (establishing bureaucratic formalities that slow down the ability for the imported product from abroad to enter the domestic market;
(3) subsidies (government financial assistances toward sectors of the home economy so that they have an influx of capital);
(4) boycotts and technical barriers;
(5) bribes and voluntary restraints.

Although the notion that the world is fragmenting into trade blocks is popular, what must be remembered is that there is not a clear definition of what a trade bloc is (Bliss 1994). Similarly, development and reduction in inequality has not been reduced by regionalism. Myanmar (formerly Burma) is a classic example: although a member of ASEAN since 1967, members of ASEAN--especially Thailand--have continued to conduct business with the oppressive military junta due to Myanmar’s abundant natural resources of teak, gems, and oil. Bliss appropriately cautions us on giving too much credit to trade blocs for development, noting that the efficacy of trade blocs “depends upon the definition of a trade bloc” which must also include an assessment of current political conditions of the region (1994:1).

References

Bliss, C. J. (1994). Economic Theory and Policy for Trading Blocks. Manchester: Manchester University Press

Brohman, J. (1995a). Universalism, eurocentrism, and ideological bias in development studies: from modernization to neoliberalism. Third World Quarterly 16(1), pp. 121-140.

Gibb, R. and W. Michalak (eds). (1994). Continental trading blocs: the growth of regionalism in the world economy. New York: John Wiley & Sons.

Hopkinson, N. (ed). (1992). Completing the Gatt Uraguay Round: renewed multilateralism or a world of regional trading blocs? Wilton Park Paper No. 61, HMSO, London.

Hunt, D. (1989). Economic theories of development: an analysis of competing paradigms. New York: Harvester Wheatsheaf.

O’Brien, R. (1992). Global financial integration: the end of geography. London: Pinter.

Preeg, E. M. (1989). The GATT trading system in transition: an analytic survey of recent literature. The Washington Quarterly 12, 201-213.

Schott, J.J., ed. (1989). Free trade areas and U.S. trade policy, Institute for International Economics, Washington, D.C., 1 - 59.

United Nations Conference on Trade and Development (UNCTAD). (1999). Handbook of Trade and Development Statistics 1996/1997. Geneva: United Nations.