A trading bloc is a preferential trade agreement between a group of countries designed to reduce or remove trade barriers between its members. According to Edward D. Mansfield and Helen V. Milner in their book The Political Economy of Regionalism, there are different types of trading blocs, including:
- Free trade areas or zones
- Preferential trade agreements (allow their member countries to have preferential access to certain products from other member countries)
- Customs unions (made up of free trade area with common external staff)
- Common markets (made up of free trade area in which physical, technical, and fiscal barriers are reduced as much as possible)
- Economic unions (made up of common market and customs union as described above)
- Customs and monetary unions (made up of customs and currency unions; share the same external trade policy and currency)
- Economic and monetary unions (made up of common market, customs union, and monetary union).
In these instances, “union” refers to a group of two or more countries that form a unit that shares the same philosophies on certain aspects of trade. (This is not be confused with an employee collective bargaining group.)
Countries can belong to a variety of different trading blocs, and the World Trade Organization tracks the status of proposed blocs.There are also regional trading blocs that form when nations within a particular region join together to reap the benefits with easy setup. These blocs are very important for the successful operation of logistics companies like Pinnacle Logistics. Some of the larger regional trading blocs include the North American Free Trade Agreement (NAFTA), the European Free Trade Association (EFTA), the Caribbean Community (CARICOM), the African Union (AU), the Union of South American Nations (UNASUR), the Eurasian Economic Community (EurAsEC), the Arab League (AL), the Association of Southeast Asian Nations (ASEAN), the Central European Free Trade Agreement (CEFTA), and the Pacific Islands Forum (PIF). You will discuss more about it, in the diploma in supply chain management program, which is offered by AIMS, UK.
The North American Free Trade Agreement of 1994 aims to create a unified free trade zone comprising Canada, the United States, and Mexico by eventually eliminating all barriers to trade such as tariffs and other protective measures.
Under NAFTA, a large number of tariffs were dropped immediately and the rest scheduled for gradual elimination. However, some documentation requirements remain to challenge exporters and importers in the region—along with perhaps deeper problems arising from cultural and political differences, the movement of labor and companies across borders, and inadequate infrastructure in Mexico.
To provide a sense of how tricky this can be, here are the four provisions for determining which goods qualify for preferred treatment:
- Goods wholly obtained or produced in the NAFTA region
- Goods produced in the NAFTA region wholly from materials originating in the region
- Goods meeting the origin rule
- Unassembled goods and goods classified with their parts that do not meet the Annex 401 rule of origin but contain 60 percent regional value content using the transaction method or 50 percent regional value using the net cost method
The immediate benefit of NAFTA to importers who bear responsibility for paying import duties was to eliminate tariffs on a number of items and schedule the rest for phaseout over the subsequent five, ten, or 15 years. Some benefits envisioned for a free trade zone in North American have been partly realized by the lowering of tariff barriers but there is room for improvement.
A side effect of NAFTA has been the growth of the companies called “maquiladora”—facilities for manufacturing or assembly of duty-free components. Many are located in northern Mexico, and while the maquiladora operations did not come into being with NAFTA, they have thrived since the inception of the agreement, becoming steadily more integral to the supply chains crossing the border between the United States and Mexico.
While the freer access to markets and labor among the three countries provides benefits to manufacturers, other conditions in the area can be drawbacks, such as:
- The lack of adequate infrastructure in Mexico
- Complex paperwork related to country of origin of exported items
- Ongoing problems with restrictions on trucking both coming into and going out of Mexico
- Ill will among the countries occasioned by plant closings and job losses.
EFFECTS OF TRADING BLOCS ON SUPPLY CHAINS
In order to have the complete picture of trading blocs, the effects on supply chains within the bloc and outside the bloc should be explained.
Effects within the bloc
According to the gravity model, countries that are geographically closer tend to have a high volume of trade. The gravity model is used by social scientists to predict the movement of people and ideas between two population centers as a function of the population of each area and the distance between the areas.
The transportation costs and trade barriers tend to be lower, countries that are closer, to one another are more likely to become trading partners by forming a trading bloc. As it is explained in the supply chain management courses which are offered by AIMS, those chains in the respective member countries usually reap the benefits of volume, quantity, and better prices and terms as well as lower levels of tariffs.
With membership in a bloc, often supply chain management will find that it’s easier and less complicated negotiating with fewer partners. With this smaller number, concessions between members can be more easily made and easily enforced, making the process less headache-ridden.
Supply chains from lesser-developed member countries with more economic and political variability can take advantage of agreements with larger entities that they would otherwise not have access to.
Effects outside the bloc
If a trading bloc is large, nonmembers may see their prices and demand for exports decrease. This can result in deterioration in trade terms and decreased market power of these nonmembers. Seeing a decrease in their exports, they may resort to protectionistic tactics and increase their lobbying efforts.
The effects of trade diverted from nonmembers’ chains can impact the nonmembers’ ability to make multi-country negotiations feasible and increase the difficulty of doing business across borders, even if it’s with the country right next door or one with which they’ve previously traded. Sometime if they are fortunate enough to continue to trade, the nonmembers may be forced to pay optimal tariffs to the bloc members.
In summary, the optimal presence of trading blocs depends on the level of potential positive effects of creating trade as well as the potential negative effects of diverting trade and creating adverse changes in trade terms for non-members.