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Concept of Trading Bloc Formation | Advantages & Disadvantages

1870 Downloads1 I Published: 09 Dec ,2019

Introduction

The following discussion is based on trading blocs,effectiveness of the approach in the world scenarioand its impact on globalised market transactions. Over last three decades, there has been a massive exchange of commercial and industrial trade among various countries from different parts throughout the globe. This has given rise to Globalisation on a vast scale. Furthermore, Globalisation has created many opportunities for remote nations to connect with rest of the world via different means.To expand business in a particular territory many of the nations made a blocs which makes them stronger in the international market for the consideration of their significance. This, in turn, has resulted in the formation of trading blocs among nations to improve relations, trade, economy and regional stability. The objective of this assignment is to deliver a clear idea of Globalisation, its impact, advantages and disadvantages,effectiveness and response of the internationalisation towards it.In addition, the following assignment will co-relate the concept of Trading Bloc Formation due to Globalisation and advantages and disadvantages of the former as well as the later. The factors that lead to the formation of these trading blocs and the parameters that affect the participation of the member nations will be discussed. It will explicitly mention major trade blocs in the world. There is also a discussion on objectives and its impacts on international community on a broad spectrum. The reader will be enlightened about several types of trading blocs and the theories behind them. This assignment is having details on the trading styles in blocs, different trading blocs, reason to make a trading bloc and involvement of nations in trading blocs which helps to find out the basic cause to create a trading bloc. At the last it is having influences of trading blocs to enhance the competitive advantages and personal interest of a country to be a in a trade bloc which helps to understand response of globalisation on them.

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Globalisation

In Layman’s term Globalisation can be defined as the process of integration of markets from different parts of the world via exchange of Goods, Raw Materials, Energy, Technology etc. and moreover to exchange of goods and technology it enhance on the proper development of the nation. This can also be the exchange of Ideas, Values, Cultural Aspects and many other Parameters (Wright, 2016, p.11). Because of Globalisation, it has become possible for one particular nation to access the resources and facilities available in some other nation in exchange of monetary units or any other goods, the globalisation is having a main benefit which involvement of the nation in the international development, technological exchange can enhance the infrastructural values of a nation and it is having a potential to provide a proper development to a nation. The advantages of trading blocs have criticised in both prospects i.e. positive and negative.

Exchange of Goods:The transportation of oil and other natural resources from one part of the world to another has become possible largely due to globalisation. The Oil Rich countries like the Arabic Nations sell natural products to other nations that do not possess adequate quantity of the same and have to suffice their demands and needs by importing. In exchange, they provide the Arabic Nations, the materials that are not so in abundance there. Therefore, it can be said that some specific group of countries have the advantage while exchanging goods. As opined by Rupert and Smith (2016, p.28) giant amount of product manufacturing in a respective region is the threat to the global economy and still, after the formation of trading blocs, the scenario remains at the same stage.

Work force and Technology Transfer:Apart from natural resources, there is another aspect of trade that has come into play because of Globalisation. It is the Regional and Economic Stability between different countries because of marketing of Final End Products like the sale of Advanced Mobile Phones and Transfer of Technology. Countries like Japan and Sweden have a tremendous production capacity of goods but ample work force is not available there. Hence, they install their manufacturing plant in a country that can provide adequate labor like China and India (Telò, 2016, p.41).

Economic, Regional and Environmental Stability:The Global Summits and meetings that are held periodically among the group of countries are major steps towards strong and balanced economic conditions of nations. Major groups include the European Union (EU) that includes most of the European Countries, Asia-Pacific (APEC), which includes Asian nations that share boundaries with the Pacific Ocean, G20 that consists of the developing countries (Banerjee and Chowdhury, 2017, p.61). These formations result in cooperation and support between countries in times of natural disaster, economic crisis and many other odd scenarios. The discussion of Global Warming on an international G20 platform is a recent example for this.

Trading Blocs

A Trade bloc can be interpreted as a Group formed among countries that share common interests in order to boost the trading activity and economic condition of the participants. This is a type of agreement that is signed between the governing bodies of the participating or even the interested nations (Chang, Chen and Saito, 2016, p.93). It is usually done to eliminate or reduce the geographical, regional or sometimes even economic barriers among the members. The resultant outcome of the trade conditions and the terms of the agreement is in favour of all the nations that hold the membership of that particular trading bloc. In order to make a critical evaluation, it will be better to say that it is the availability of resources to introduce a particular trade bloc (Ghosh, 2016, p.102).

As stated above, many Trading Blocs have formed in the recent times with an intention of increasing regional cooperation, economic stability and trade activities among the countries. Some of them are as follows.

NAFTA:The North American Free Trade Agreement is a pact that was signed between the United States, Canada and Mexico on January 1, 1994. This was formed to enhance trade and relation between these three countries. This US $ 767 Billion trade bloc is known to be the most powerful one in the world.

EUROPEAN UNION: It is a largest trade union or a bloc of 28 nations as a member which are situated in to the Europe. It is group which provides barrier less trading of goods and services and companies are free to move their business in new markets. Belgium, France, Italy, Luxembourg, Netherlands and West Germany are the main countries which are leading the EU.

GATT:It is a type of agreement which was done by 23 nations in the Geneva, it is an agreement of the nations to enhance their international trade to circulate their economy and make a better employment and trade and as well as to make a better relationship in these countries.

ASEAN: It is a group of South East Asian countries which is called as a ASEAN for the economical development. It is having a main objective to improve economical development in the group members. The combine economy is the sixth largest economy in the world. So these countries governments are making a better development by supporting each other.

SAARC:The South Asian Association for Regional Cooperation that is headquartered in the capital of Nepal that is Kathmandu was established in December 1985. The members are the South Asian nations like the India, Bhutan, Afghanistan, Bangladesh, Sri Lanka, Nepal, Maldives and Pakistan. The aim of the policies of SAARC is to develop better internal and external relations, developed welfare economics, self and mutual reliance among the nations of South Asia and boost up the social and cultural development of the region.

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Factors behind establishing a Trading Blocs

Many factors play important roles in the creation of Trading Blocs among different countries. Throughout the world, there are countless trading blocs and not all of those are based on trading. However, in earlier 1960, the base of trading started according to trade benefits. Some of them are mentioned below:

Geographical location:The member nations of a particular Trading Block need to be close to each other geographically. Geographical Location plays an essential role as respective countries need to maintain similar interests and level of participation in the group. Moreover, the countries that share common geographical locations and features are likely to have similar issues to be discussed and identical ways of trade (Shinyekwa and Othieno, 2016, p.129).

Economical Status:The economic conditions are often taken into consideration while forming a trading bloc. The reason for this is the possibility of a successful trade among them and the scope of resources and work force available (Van Hoa and Harvie, 2016, p.157).

Trade Policies:The members of any bloc need to have similar trade policies in order to maintain an effective way of trade execution and a set of successful business parameters. This includes the policies and principles adopted by the nations for trade and ease of doing business internally and their compatibility with international trade market (Joshua, 2016, p.172).

Therefore, it can be said that countries of a particular region tend to make partnership with other countries for additional benefit and sustainability support, but in most of the terms, such collaborations lead to threatened situations and prove to be a cause of dependence on others (Hirst et al.2015). All of these prospects are highly variable as well as critical. In the following discussion, some important advantages and disadvantages are reflected according to current global scenario of trade bloc.These trading bloc helps to the nation and as well as to those companies wants to explore their business and as well as which wants to make a better position in their sector. Geographical locations, economical conditions and trade policies are the main reason behind to establish a trade bloc which helps to them to make an economical, social, cultural and technological development of the nation.

Involvement of Countries in Regional Trading Blocs

The effective participation and engagement of countries in Trade blocs are very much necessary in order to make the phenomena of Globalisation a success. Each country has its own sets of resources and expertise (Riveras and Harrison 2016 p.375). Through active participation, the nations can discuss the needs and demands of the goods and raw materials for each other. The formation of trading blocs mentioned and discussed in the above paragraphs has resulted in the involvement of many countries to follow this culture.

An example can be considered of a Gulf country that is rich in petroleum reserves and a country that is technologically very advanced, like Japan or Germany. The technologically advanced nations will lend their state of the art machinery and another form of technology to the Gulf countries in order to enhance their lifestyle, daily facilities and to do the refining of petroleum products. However, in exchange of the high-tech infrastructures, these technologically advanced nations will fulfil their requirements of natural gas and petroleum products by importing the later from the Gulf nations.

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Another example for engagement of countries in regional trading bloc establishment is the investment of rich nations like USA, Britain and Australia in the countries of Africa. The African countries are very under-developed compared to other parts of the world due to lack of education, infrastructures, communication system and bare necessities like drinking water and ample supply of food. However, these nations have huge reserves and mines of diamonds and other precious and semi-precious stones (Odularu and Adekunle 2017). Hence, the rich nations put their investments in the African countries in the form of the requirements and in return, they get access to the diamonds and other resources that have high demand in the international market. This is a deal of profit for both the sides.

Environmental Benefit:The engagement of the countries in trading blocs ensures a sense of cooperation among them to maintain a proper balance between the manufactured infrastructure and the Mother Nature (Lunn and Hoffmann, 2016, p. 194). When industrialisation and production of finished goods are done in an excessive amount, the chances of environmental pollution increase exponentially. Hence the all the nations including those that produce a huge quantity of products and those that import those products have to be cautious about the harmful effects of Globalisation and industrialisation that is one of the major reason of Global Warming. Keeping in mind, the issue of Global Warming was raised in the recently held G20 Summit held in Paris, France. The decision of reducing the emission of Carbon compounds was made mutually by the member's nations.

These trade blocs enhance the potentials to increase the awareness of the particular trade bloc on particular topic which increase the globalised values in them. Each and every country is having their own personal interest in it but it increase their potentials to provide a better relations and coordination among them.

Trading Bloc and Globalisation

Trading bloc and globalisation share a common and a very deep link. In a trade bloc, the countries make a separated group to do business all over the world. This help the global market to have a fixed and reasonable market price for a product. If countries are doing a business separately then market price of products will be only increased in order to make profit. When trade blocs are made, they fix price of products that the participant countries need to follow while dealing with other countries in the bloc. Therefore, trade blocs have positive effects on global economy and able to fix a reasonable price of products that is affordable for everyone.

In addition, trade blocs have other positive effects like the member countries might not face Visa problem for business purpose in abroad. Group members will not face communication problem as they are of a same trade bloc (Gleeson and Friel 2013 p.1510). They can compare their business with other trade blocs and improve their business. If this comparison of business considers in a positive way it can lead the global market to an immense success and developed economic system.

Globalisation also has negative impact on developing countries. As the developed countries have the opportunity to dominate developing countries. Developing countries that do not have sufficient supply of certain product instead of supplying, developed countries try to own the market and empower their own economic system. Hence, developing countries are affected by globalisation.

Trade blocs are also not supportive in globalisation in few cases, like the members are interested in doing business with the bloc members only. Therefore, the business will be limited in a small circle. It will not proceed in the global market. That means, other countries that are not included in that group will be out of the business. It can harm the global economy and loses the balance between supply and demand of products.

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To conclude in a broad perspective, the establishing of Trading Blocs are very important to make the Globalisation a success (Fredrick et al. 2014). It is usually very difficult to manage and conduct the trade in a big domain. Hence, the phenomena of Trading Blocs help to create smaller modules regarding the trade. This further simplifies the policies and monitoring of the trade segments and maintains a transparency among the nations. This also helps them to stand united during the times of odd circumstances.

For example, during the Greece crisis, the European Union was a major and significant help to the Greece. The combined efforts of the EU nations helped the Greek economy to regain its pace and growth by providing monetary and ideal support.

Similarly, during the earthquake that happened in Nepal, India immediately sent the food and other essential supplies along with military and disaster management support for rescue purposes. So these trade blocs supports to each others but as well as they creates limitations among different nations, it divides the international market in to different parts which creates a boundaries in the international trade and as well as it decrease the international development of the country.

Impact of trading blocs on globalization

As it has been defined earlier that trading blocs and globalisation seem to have a contrary stage. After the introduction of common international trading, some of the leading countries especially some trade giants had lost their geographic boundary. It cannot be said that there were only negative impacts that globalisation had introduced. Formation of regional groups rebuilt the boundary and there were some new trading phenomena those faced by the member countries. One of the important ones is free trade agreement among member countries. As for example, some of the countries within EU are engaged in free trade agreement (Miroudout and Shepherd, 2014, p.1752). It means that while transacting some trading items within member countries, there are lesser pressures of legal guidelines and taxation policies. EU has a large circle of trading throughout the world. They expanded their business over 26 countries. EU has a major impact on global economy.

Trading blocs have both good and bad effects on globalisation. As there are many trade blocs around the world and they have specified group of employees and officials to monitor the workflow of the group (Yang and Martinez-Zarzoso, 2014, p.140 ). Therefore, employees are hired in a huge number for these trading blocs. It helps to develop the scenario of unemployment in a global stage. Trade blocs help the world to become more focus on the future of a business and extract profit in a rational way. Before, the formation of trade blocs has happened there were no unity among the top brands and companies of the world. Hence, trade blocs made people aware first to do businesses in a rational and organised manner. However, it is practically hard to get actual operational outcomes of some active trade blocs (Saboo et al.2014, p.14). Trade bloc included countries have advantages of dealing with a large scale of economy. The participant companies can make profit from staying in the trade blocs.

Trade blocs also have bad effects as EU has put high tariff on food, and materials that they export to other countries. It affects the economic system of those countries who import their products and EU manages to gain maximum revenue from it. Formation of trading bloc can enhance the values of a particular nation and they can create a back support for them but it makes them dependent on them so it is essential for the nation to make a better globalisation strategies by which they can make a better political, social, environmental and technological development in the country.

Personal interest of countries in forming trading blocs

Generally, the relationship between trading blocs and globalisation is related to countries. Membership of different countries is important to form a trade bloc. Countries that join certain trade blocs have knowledge about benefits of trade blocs (Lake, 2016, p.48). If the countries around the world want to compete with developed and economically powerful countries, it will be difficult to do the job. Therefore, the developing countries join trade blocs to empower themselves. Joining the trade blocs would help the developing countries to have a strong political, economical and social impact of trade blocs. In regional blocs also the countries have their regional trade blocs to empower their business and economical status. If regional trade blocs are not able to provide their member countries what they want, the harmony among them will be destroyed and it can affect the global economic status and market.

There are many strong and effective trade blocs like EU, NAFTA, GATTand ASEAN in global economy. EU and Japan made a trade bloc, for the sameJapan promotes their domestic market in the global economic system. NAFTA collaborate with Canada and Mexico to strengthen their performances in the global market to improve economic status of the region. Different countries have different motto to join trade blocs (Leermakers et al. 2013, p.1484). Some countries want to strengthen their political support to compete with strong and powerful countries of the world. Some of them want to strengthen domestic economic system and want be presentable in global economy. Others want a standard social status. Therefore, trade blocs need to be form with different dynamics of aspects to fulfil the wants of member countries of certain trade bloc.

Countries join a trade bloc with the hope that it will help them to stand beside the powerful countries of the world that they cannot do for themselves as a single economic system (Yeung, 2016, p.1). They want trade blocs to provide them certain power to prove themselves in the global market. Therefore, before forming a trade bloc the members in power must consult with the member countries about their expectations from that trade bloc. Head person of that trade bloc should decide and finalise the rules and policies of that trade bloc.

A trade bloc has certain rules, regulation and policies to be maintained. If the members do not properly follow rules, then it will not be successful. They should follow the policies and rules to extract maximum benefits from the trade bloc.

Trade blocs help the countries, who are not strong enough to compete with the developed countries. A regional trading community has other benefits also like maintaining the economic scale of a certain market. Trade blocs make rules for doing businesses in a same manner and with same purpose (Peret al.2017, p.155). It helps participant countries to develop their foreign investments in domestic market. It helps to maintaining the effectiveness of global economic status. Participant countries are mostly benefited by market efficiency that they could get only as a member of trade bloc.

Global competitive advantage

In earlier times, competitive advantage used to be entertained within a restricted boundary. Hence, there were least options to get glances of global or regional terms (Asongu, 2014, p.347). Globalisation has brought the opportunity for a regional business in terms of global competitive advantage. In more or less global competition has made dimensional impact while forming trading blocs. Initially, global competitive advantage has greatly influenced in forming regional trading blocs and on the other hand, engaged countries have found benefits to chase market policies while making benefits in business. Some renowned trading blocs like Eu or OPEC has understood their capacity and different terms of business needs while chasing another (Chaudhariet al. 2016, p.45). It cannot be said that a specific trading bloc or regional business group always perform equal economic performance as there are variations in contribution and economic stability among engaged countries. In that concern, trading bloc has greatly emerged the prospect of competitive advantage as well as engaged countries having found some stages to understand interests of other countries. In terms of global competitive advantage, some of the important factors have found validation and those include:

  • Macroeconomic forces and future policies to boost economy
  • Availability of resources in order to be engaged within an international business forum
  • Competition policies played by neighbour countries
  • Recommendations for infrastructural improvement
  • Utilisation of available workforce

One of the efficient impacts of trading blocs, in terms of competitive advantage includes co-operative efforts of a group of nations for chasing global competition (Shinde et al. 2017, p.75). There is no doubt that globalisation is a booster for developing trade and economy and at the same stage, it is a threatening measure for developing countries. Practically, some leading trading blocs like EU or OPEC are managing their own initiatives for making trade in available and specified products. Therefore, it is very evident that other countries especially the developing ones are getting additional pressure to chase such combined policies. The result comes as a regional base of competition and followed by the same, a new season of competitive advantage has been experienced by global trading countries (Barr et al. 2016, p.41). Besides, the benefits of competitive glances, a respective group of countries or individual firms have found additional references to attract FDI. Some leading countries of EU are getting the advantage of economic scenario prevailing in other trading blocs. However, it can be said that inauguration of trading blocs have emerged new tendencies of international business transactions and sharing of information (Osgood, 2017 p.189).

Disadvantages of trade blocs

As trade blocs help to develop the scenario of unemployment, they have the tendency to cut down the employees in a short period. Working in a trade bloc is very hectic and difficult to handle, workers are also less interested in trade blocs. Competition among the companies of different trade blocs becomes the competition between the member countries of it. It affects the political status and business strategies. Trade blocs are used to transact their products within the group. The participant countries are getting used to same manner of trading. There is no scope for bargaining for products (Beneriaet al. 2015, p.42). Trade blocs are maintaining geographical borders and to limit their business within the border. Therefore, other countries cannot have benefits of certain products. High tariff of products is one of the worst parts of these trading blocs. The member countries are doing business without paying taxes to their government as they are of same trade block. This can be threat to governments of respective countries as there are no such rules to pay taxes and it is a huge economic loss for a country. In future, if more countries were decided to join trade blocs then it would be a major drawback of trade blocs, they should ask their member countries to follow the rules and transact their products by obeying the laws of trade bloc. However, some other critics have opined some national issues those are caused due to regional trade agreements and one of the major ones is unemployment. Agreements in different countries bring different commercial institutions together and employees face a threat of unemployment. For example, EU has experienced a longer period having lower wages as well as unemployment. Another practical drawback of such international joint venture is dependence. Whenever a respective country faces unemployment and lower wages, business transactions also face lower rate followed by recessions. Therefore, weaker economy has to make dependence on stronger member countries. However, all of these prospects are highly variable according to vision statements of trading blocs and status of dependence; some specific disadvantages are quite evident for all the time.

Conclusion

This essay has focussed on the formation of trade blocs, advantages and disadvantages of it. There are also discussed the impact of trade blocs on globalisation. This project emphasises more on the economical status of the member countries of trade blocs. However, there are other aspects too that causes the formation of trade blocs. Social status, educational status and political status also related to trade blocs. Since 1960, trade blocs are working throughout the world. Trade blocs have been made for gaining regional profit. As discussed above, they became a group and to limit their business in a small group of countries. The countries that have sufficient materials to distribute they plan to gain revenue from it. They made a clear strategy to gain more revenue and strengthen economy. Hence, government should be more conscious about the taxes paid by the business companies. Moreover, they should concentrate on other aspects as political and social benefits of joining trade blocs.

Reference list

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