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Economic Trade Blocs

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There has been a considerable development in regional economic integration schemes designed to achieve various economic, social and political purposes. Most countries in the world are members of one or more trade blocs known as regional integration agreement/arrangement (RIA). There has been a worldwide trend towards forming new regional arrangements and strengthening the existing ones. Inspired by the European Economic Country (EEC), now more popularly known as the European Union (EU) several regional integration schemes have been formed by the developing countries, particularly in Latin America and Africa. One more regional integration, that comes close to the EU in its boldness or its potential implications for the world economy is NAFTA (Cherunilam, 2005).

Barriers to Trade in Selected European Union & NAFTA

A trade barrier is a common term that explains any regime policy or instruction that confines international trade. It can take many shapes, including: import duties, import licenses, export licenses, import allowance, taxes, subsidies, non-tariff barriers to trade, local substance necessities. Most of the trade barriers work on the similar principle i.e. the obligation of some kind of cost on trade that lifts the price of the traded products. Other trade barriers comprise of differences in culture, traditions, society, laws, language and exchange. Following are the trade barriers for identified trading blocs like European Union & NAFTA:

  • Customs duties among member states.

  • Obstacles to the free course of import and/or export of goods and services among the member nations.

  • Industrial/commercial policies concerning different countries.

  • Barriers on movement of capital and people within the block.

  • Common farming policies, transfer policies, scientific standards, fitness and wellbeing rule.

  • Boundary control between different countries.

  • Different internal taxation systems.

  • Legal structures for business.

  • Controls on movement of capital between the member countries.

  • Protectionist community procurement policies.

Advantages & Disadvantages of being a Member

Advantages:

  • Friendship, cooperation among member countries strengthens.

  • General state of member countries increases.

  • It gives freedom to travel between member countries by simplifying visa regulations.

  • A single economic space is created for member countries where they use common currency.

  • Safety improves for member country.

  • Trade relations strengthen, commodity circulation grows and trade improves in general for the member country.

Disadvantages:

  • National traditions and distinctive traits are lost by the member countries.

  • Deflationary propensity increases between the member countries.

  • Loss of power by the member country.

  • Over estimation of trade benefits (Advantages and Disadvantages, 2008).

Membership Conditions for European Union

If a country wants to join the EU, it must value the doctrine and ideals upon which the EU is established. According to the treaties, contender countries must value the principles set out in agreements of European Union earlier than they can join the EU. Agreements affirm that "The Union is based on the ideology of liberation, democratic system, respect for human rights & ideologies which are ordinary to the Member States". Following are some principles which are required to be achieved by the country which wants to become a member of the EU:

Political Principle: Country should be stable in providing definite democracy, the decree of law, human rights and admiration for and safety of minorities.

Financial Principle: The survival of a running market economy as well as the ability to deal with aggressive force and market forces inside the Union is necessary for the member country.

Institutional Principle: The country should have the capability to take on the compulsions of association, which contain the goals of political, economic and economic union (Conditions of Membership, 2005).

Conditions for Membership

Achieving membership in NAFTA is not an easy task. Membership to NAFTA would require discussions for membership in the World Trade Organization (WTO) which takes a great deal of time because many countries are standing in line for this membership. Member country needs to negotiate different deals with dozens of WTO member countries and G-7 countries (Entering NAFTA: the twists and turns of negotiations, 1995).

Impact on the Bilateral or Multilateral Relations

By joining the European Union and other trading blocs like NAFTA, United States will become the member of these Unions. These membership conditions for the selected regional trading blocs will help in determining the positive and negative impact on the bilateral or multilateral relations with the United States. These impacts are given as under:

Positive Impacts:

  • U.S will attain significant achievements in economic reform.

  • EU and NAFTA will present a large and open market for the U.S.

  • Member States of the trading blocs will be able to socialize freely all over the twenty-five countries.

  • US exporters will enjoy lower tariff rates in their deal among the new Member states.

  • The present system in which US exporters are confronted with a range of import rules will depart.

  • US industry, investors and exporters will be benefited from these trade blocs in their deals with others (Bilateral agreements and fair trade practices, 2007).

Negative Impacts:

  • The bilateral investment agreements accomplished among new Member States and the US will require proper alteration in order to make certain that US investors enjoy similar investment surroundings.

  • Existing import quotas maintained by the EU and NAFTA will require modifications to take in consideration trade flows between the new Member States and other countries.

  • The present EU tariffs levels will also be applicable to new Member States like the U.S (Burghardt, 2004).

Cost of Compliance and Non-Compliance

In the EU Treaty, the basic underlying principle is the loyalty of the Member States to the community through quick compliance with its systems. This guideline states that Member States can take measures to ensure completion of the obligations arising out of this treaty. The countries can also assist in the fulfillment of the community tasks. Further, they shall desist from any actions which could put in danger the accomplishment of the objectives of this agreement.

Broadly, this issue of compliance has many features:

  • Legal,

  • Political,

  • Institutional,

  • Economic.

There can be a possibility that member states may fail to act in accordance with this agreement. The reason can be unwillingness and unawareness of the compulsions. The compliance costs are higher comparatively in those countries which have at least one subsidiary than with those which have no subsidiaries. The increase in the compliance costs can be seen when there is an increase in the member of subsidiaries in foreign country. For large corporations, total weighted cost of compliance is approximately 1.460.000 and for medium size companies it is 203.000.

Impact of Trade Transactions

There are potential gains for member & non member countries and trade blocs from economic integration which are as follows:

  • Trade Creation: Whenever trade barriers between countries are removed, industries in respective countries will concentrate on the most efficient use of resources and produce those goods that they are most efficient at producing. All participants will gain from this kind of trade practice.

  • Trade Diversion: It occurs when trade is diverted from countries outside the trading area to the countries located inside it.

  • Prices and Competition: The removal of trade barriers has both consumption and production effects for member and non member countries.

  • Economies of Scale: Many industries, such as steel and automobiles, require large-scale production in order to obtain economies of scale in manufacturing. Formation of trading blocks enlarges the market so that the large scale production is justified.

  • Dynamic Effects: The dynamic effect of integration is that it brings about a more efficient allocation of resources throughout the different trading blocks promoting the growth of some businesses and the decline of others, the development of new technology and products and the elimination of old processes.

  • Restructuring: This process is creating a large scale restructuring of industries and firms, with the relocation of industry and many cross border mergers & alliances.

All the impacts of trade transactions show that this will be helpful for the expansion of project. These trading blocs will have a positive impact on expansion as these agreements will offer measures for protection. Under these measures, any product which is the subject of preferential treatment is imported into the territory of a contracting party in such a manner or in such quantities as to cause or threaten to cause serious injury in the importing country (Hill, 2005).

Conclusion

Based on this analysis the regional trading bloc which can be selected is European Union which is also known as the European Community and the European Common Market. This agreement eliminates tariffs, quotas and other barriers on intra community trade which is necessary for expanding a project. This trading bloc devises a common internal tariff on imports from the rest of the world and permits the free flow of factors of production within the community. It helps in harmonizing taxation & monetary policies and social security policies between member and non member countries. It presents a common policy on agriculture, transport and competition in the industry (Cherunilam, 2005).


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