Trade Bloc

Trade blocs refer to groups of countries that have established preferential trade arrangements aiming at increasing trade among each other. Trade blocs have been formed along geographical lines leading to the emergence of regional bloc trading. The terms trade blocs and trade pacts are often used as synonyms in literature. Here, trade blocs are understood as trading areas formed by one or several trade pacts.

In Europe, the European Union (EU) and the European Free Trade Association (EFTA) have established an even larger trade bloc, the European Economic Area (EEA). Via free trade areas (FTAs), preferential trading is planned to be extended to the Mediterranean area and southeastern Europe.

In the Americas, several regional trade blocs have emerged, mainly based on the Southern Common Market (Mercosur), the Andean Community (ANDEAN), the Caribbean Community (Caricom), the Central American Common Market (CACM), and the North American Free Trade Agreement (NAFTA). Mercosur and ANDEAN have concluded first steps toward the establishment of the Union of South American Nations. Intra-American trade integration is further fostered through bilateral trade agreements among individual American countries that are members of different trade blocs. Moreover, an all-American agreement, the Free Trade Area of the Americas (FTAA), is being negotiated, although negotiations have recently experienced setbacks.

In the Asia-Pacific, the Association of Southeast Asian Nations (ASEAN) Free Trade Agreement (AFTA), the ASEAN and China FTA, and the ongoing ASEAN plus three negotiations (with China, Korea, and Japan) have created or aim for plurilateral integration schemes fostering the emergence of an East Asian trade bloc. Furthermore, a network of bilateral trade pacts within the region has evolved. Also, the Pacific has seen several regional trade arrangements, while a multitude of trade pacts in central Asia aim to establish the economic links formerly existing within the Soviet Union.

In North Africa and the Middle East, integration attempts were launched with the Gulf Cooperation Council and the Greater Arab Free Trade Area. In Africa, high-level regional agreements have been concluded (e.g., the Southern African Customs Union and the West African Economic and Monetary Union). Nevertheless, Africa features a very low level of intraregional trade, trade pacts are overlapping, and the provisions of the agreements are rarely enforced.

Growth of Trade Blocs

Hence, although the number of intraregional trade blocs has grown, consolidation into continentwide trade blocs has recently stagnated. Furthermore, cross-regional trade pacts are increasingly concluded that link individual nations of different trade blocs with each other and trade blocs with individual nations of other trade blocs. Arrangements such as the Asia Pacific Economic Cooperation (APEC) that span several continents have evolved. This has led to the emergence of what Richard Baldwin calls “fuzzy leaky trade blocs.”

With the proliferation of trade blocs, their welfare implications in the short run, and their role for further worldwide multilateral trade liberalization in the long run have been extensively debated in academia.

Jacob Viner was the first to highlight the effects of trade creation and trade diversion in 1950. Trade creation occurs when domestic products are replaced by cheaper products from trade bloc members. However, members of a grouping can also reorient their trade away from low-cost nonmember countries toward higher-cost member countries, leading to trade diversion. Which effect prevails depends on the trade patterns of a country or trade bloc and the levels of tariffs prevailing prior to liberalization. Moreover, when the [Page 1593]terms of trade of trade bloc outsiders deteriorate as products from outside the bloc get more expensive, beggar-thy-neighbor effects occur. As the size of trade blocs increases, they obtain greater bargaining power and show more aggressive trading behavior, potentially leading to trade wars. Nevertheless, Paul Krugman and Laurence Summers have argued, although not without criticism, that trade blocs of countries that naturally trade with each other due to proximity or other economic motivations are welfare enhancing, as trade diversion is minor. A different set of welfare losses is anticipated as a result of the lack of transparency because of the “spaghetti bowl” nature of trade blocs. But also welfare gains are expected to occur in the long run, because of the increased market size and competition in trade blocs leading to economies of scale and higher productivity and innovation.

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