Regional Trading Blocs - International Business Management

What are Regional Trading Blocs?

The countries that are within the boundaries of a specified geographical location form into a group or a co-operative union known as regional trading bloc (RTB). RTB facilitates a layer of protection to its member countries against the imports by the non-members. These trading blocks are of different types. They are as follows -

  • Preferential Trade Area – All the countries pertaining to a specific geographical area, when decide on reducing or completely eliminating of the tariffs on the desired goods and services, the Preferential Trade Area comes into existence.
  • Free Trade Area – A step ahead and in continuation to the Preferential Trade Area, the member countries when they accept to completely remove the trade barriers on all the goods that are being imported from the member countries, A Free Trade Area is formed.
  • Customs Union – A union which completely eliminates the tariff barriers and a common tariff for non-members is being decided by a Custom Union. All the members of the Custom Union trade with the third parties as single entity.
  • Common Market – An economic integration in which the economic resources are being traded freely by all the member countries. Common markets believe in removing all the trade barriers, including the non-tariff barriers.

What are the advantages of Regional Trading Blocs?

Setting up of Regional Trading Blocs has the following advantages -

  • Foreign Direct Investment – The economies of the members of the Blocs avail the benefits of Foreign Direct Investment
  • Economies of Scale – As the products are manufactured in bulk locally, the costs are lowered and the markets avail the benefits of Economies of scale.
  • Competition – Manufacturers from different member countries are brought at one place, thus leading to greater competition which enables to increase the efficiency of the member countries.
  • Trade Effects – The elimination of tariffs, leads to reduction of cost. The low costs results in more demand for the goods by the consumers.
  • Market Efficiency – Due to all the above advantages of increasing demand, increasing consumption, reduced cost and increased production makes the market efficient.

What are the disadvantages of Regional Trading Blocs?

Setting up of Regional Trading Blocs is not left without some of the disadvantages. They are as follows –

  • Regionalism – Favouritism can be observed by the Trading Blocs upon its member countries. The tariffs and quotas that are been fixed are only in light of benefiting the trade to the member countries. The regional trade bloc members follow Regionalism against World Trade Organization.
  • Loss of Sovereignty – When a trading bloc transforms into a political union, the sovereignty of the member countries is being lost.
  • Concessions – The non-member countries are provided access to the RTB member countries, only after charging the taxes. Concessions are provided only to the member countries.
  • Interdependence – As the interdependency of the member countries increases, the effect of one country due to some of the natural calamities or conflicts or revolution lead to affect other countries as well.

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