International Trade

UNIT 6 REGIONAL TRADE BLOCS

Objectives
After reading this unit, you should be able to:
 explain the types of trade blocs;
 analyze the reasons behind the upsurge in trade blocs in the recent past;
 identify the major trade blocs in the world; and
 brief-up the history of European Union (EU) which is the largest trade bloc.
Structure
6.1 Introduction
6.2 Types of Trade Blocs
6.3 Benefits of Trade Blocs
6.4 Reasons behind the Recent Upsurge in PTAs
6.5 Welfare Impact of PTAs
6.6 Trade Creation and Trade Diversion
6.7 Major Trade Blocs in the World
6.8 European Union (World’s Largest Trade Bloc)
6.9 Summary
6.10 Key Words
6.11 Self-Assessment Questions
6.12 References/Further Readings

6.1 INTRODUCTION
Regional Trading Bloc; popularly known as trading blocs, is a group of countries within
a specified geographical region, which specify the common trade policy vis-à-vis tariff,
non-tariff issues, and other trade issues such as movement of labour and capital among
themselves with an objective of creating Free Trade Area or Customs Union or Common
Market Area or Economic Union. In short, they are a force of economic integration
which increasingly shapes the world trade (www.economicsonline.co.uk). Trade blocs
can be stand-alone agreements among several states. Trade blocs fall into different
categories based on the level of economic integration. These categories are discussed
in subsequent section.
After second world, countries realized the importance of trade not only for economic
development but for promoting peace and prosperity in the region. Free trade initiatives
were taken, particularly in Europe where countries pool their coal resources in order
to help each other and avoid conflicts. This small initiatives result in formation of
European Union after passing through various stages of economic integration. Today,
there is no region in the world that does not have free trade agreements or other
initiatives for free trade and commerce. Various stages of economic integration have
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been evolved namely preferential trade, free trade, custom union, common market and Regional Trade Blocs
economic union. Free Trade encourages labour force specialization and also help
countries specialize in the areas of their factor endowments. In other words, free trade
allows a country to produce and export what it does best and most efficiently, while
allowing it to import specialized goods from other countries. Thus, Free trade helps
both sides to save costs while gaining superior products through the exchange of goods
and services. Regional Trade Agreements have many other benefits which can be
diagrammatically (Figure 6.1) understood as under:

Improved Standard of Living Through Superior Goods At Lower Prices

Competition Induces Innovation

BENEFITS OF Free Trade provides incentives for countries to be at peace with each
FREE TRADE other

Economic Freedom offer more employment opportunties

Harmonised Law/Rules promotes Transperency and reduces red-tape

Figure 6.1 : Benefits of Regional Trade Agreements

Since the 1980’s, the trade blocs have spread throughout the world economy under
the harmonized and liberalized economic regime shaped under the 8th round of Uruguay
Round of Trade negotiations and subsequently under the ambit of WTO. Compared
to 7trade blocs that were notified to GATT/WTO in 1980, at the end of 2021, there
were 586 trade blocs. Their number has increased significantly after the formation of
WTO, as nation’s increasingly realized the merits of foreign trade, providing a catalysing
force for economic growth and development.
These statistics show the importance of trading blocs in the present world economy,
and provide a motivation to examine them in great detail, which is taken up in this
unit.

6.2 TYPES OF TRADE BLOCS

There are various types of trade blocs. These are:
 Preferential Trading Arrangements (PTAs)
 Free Trade Agreement (FTA)
 Customs Markets
 Common Markets
 Economic Union
 Political Union
Preferential Trading Arrangements (PTAs): It is a kind of trading bloc that gives
preferential access on certain products to the member countries. It can be established
through a trade pact and is the first stage of economic integration. The tariffs and non-
tariff barriers are reduced only on a part of all traded goods. The PTAs are advanced
to next stage of economic integration that is Free Trade Area.
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International Trade Further, the Exhibit 6.1 as under describes the levels of economic integration in various
types of regional economic groupings.
Exhibit 6.1: Levels of Economic Integration in Regional Economic Groupings
Level of Preferential No Common No Harmonized/ Unified
Integration Duty Tariff External Restrictions Unified Economic
Regime and Tariffs and on Economic & Political
Non- Harmonized Movements Policies & Policies &
Tariff NTB of Labor & Institutions Institutions
Barriers Capital

Preferential Trade Yes No No No No No

Agreement

Free Trade Area Yes Yes No No No No

Custom Union Yes Yes Yes No No No

Common Market Yes Yes Yes Yes No No

Economic Union Yes Yes Yes Yes Yes No

Political Union Yes Yes Yes Yes Yes Yes

Source: World Trade Organization.

Free Trade Area/Agreement (FTA): In a FTA, all tariffs and non-tariff barriers are
removed exception being some items in the negative list which is mutually agreed among
member states. Examples of FTAs are the NAFTA (North American Free Trade
Agreement) and India-Sri Lanka Free Trade Agreement. Rules of Origin (RoO) are
framed which specifies the conduct and criteria of value-addition under a FTA. Rules
of Origin provide protection against malpractices used by firms beyond the member
states to export goods at lower rates of duties. For example, when India and the Sri
Lanka are FTA partners and offer 0% duties to each other subject to fulfilment of
Rules of Origin criteria. Sri Lanka in turn may have a FTA with another country, let us
hypothetically assume, it is China. Chinese firms will export their goods at zero duty
first to Sri Lanka and such goods do have a probability to enter India under India-Sri
Lanka FTA. But, Rules of Origin will ensure that such goods cannot enter Indian
Territory without fulfilling the criteria as mandated under Rules of Origin.
Customs Union (CU): In a customs union, external tariffs are harmonized among
member states for the goods originating from the non-member countries. Thus, a CU
has a common external tariff (CET) against non-members states. Because the tariff is
the same for all member countries, rules of origin are not required to prevent “backdoor”
imports from non-member countries. South African Customs Union i.e. SACU (a
regional economic grouping among countries such as South Africa, Namibia,
Mozambique, Botswana and Eswatini, erstwhile Swaziland), is an example of customs
union.
Common Market: A common market have all features of a Customs Union, i.e.
elimination of tariff and non-tariff barriers plus common external tariff and also have
provisions for free movement of labour and capital within the regional economic grouping.
Central American Common market consisting of Costa Rica, El Salvador, Guatemala,
Honduras and Nicaragua, is an example of Common Market.
Economic Union: An economic union is a common market coupled with harmonized
102 and unified economic policies which are coordinated among the member countries.
Economic Union have common trade policies, common external tariffs, free movement Regional Trade Blocs
of labour and capital and common banking and monetary policies. For example, in an
economic union, countries, normally, have a common monetary and fiscal policy and a
common currency. The purpose of the Maastricht Treaty was to move the European
Community (EC) from a customs union to an economic union, with a common currency
(the Euro) and central bank (the European Central Bank).There can be a monetary
union with an economic union, for example Euro Zone countries having a common
currency, EURO with European Union which is an Economic Union. Monetary Union
is a case when two or more member states have common currency thus leading to
formation of a Monetary Union.
Political Union: Political Union is the highest stage of levels of economic integration in
a regional economic grouping. In addition to economic union, Political Union envisages
the harmonization of system of political governance, i.e. single government, one
president, one foreign policy, one defence policy among the member states. In nutshell,
the member countries of an economic union decide to become a one country.
PTAs, FTAs, Customs Unions and Economic Union are termed as Regional Trade
Agreements in the terminology of WTO. Henceforth; we will use the term RTA as a
broader term to discuss various aspects of trade blocs.

6.3 BENEFITS OF TRADE BLOCS

Following are the benefits (Figure 6.2) of Regional Trade Blocs.
 Increased Production & Better Economies of Scale: Free Trade/Regional
Trade Agreements enable participating countries to specialize in the production
of those commodities in which they have a comparative advantage or factor
endowment. Increased specialization in areas of core competency enables
countries to take advantage of efficiencies generated from economies of scale
and scope, higher productivity and increased output.

Benefits of Regional Trade Blocs

Improvements in Greater Production Improved Economic Increased Production &

Employment Scenario Efficiencies Growth Better Economies of Scale

Figure 6.2 : Benefits of Regional Trade Blocs

 Greater Production Efficiencies: Free Trade Agreements help an effective

division of resources and improve the efficiency of resource allocation. Effective
and efficient resources allocation results in higher productivity and increasing
total domestic output of goods and services. Firms from the participating
countries compete for market share leading to innovative production
techniques, use of new technology, better management practices and marketing
skills and cost effective distribution and transportation methods.
 Improvements in Employment Scenario: Free Trade Agreements create
more business opportunities and investors throng to such cost competitive
areas of business. This leads to improvements in employment scenario in
exporting industries. For example, with liberalized trade regime in services
sector, India has created 4 million direct jobs in software and IT enabled
industry. 103
International Trade  Improved Economic Growth: Regional Trade/Free Trade Agreements
improve the overall business environment due to spill over effects resulting in
higher standard of living, higher wages leading to increased real incomes and
improved economic growth due to increased consumers spending.

6.4 REASONS BEHIND THE RECENT UPSURGE IN

PTAs
The principle of non-discrimination is central to the formation of the GATT Agreement,
which is signed on 30 October 1947 by representatives from 23 countries in Geneva.
Article I embodies the strong support for non-discrimination, requiring Most-Favoured-
Nation (MFN) status for all GATT members. The only significant exception to MFN is
to be found in Article XXIV, which allows formation of Regional Trade Grouping with
the objectives of promoting and facilitating free trade and acting as a ladder to formation
of globalized world order under transparent and non-discriminatory trade regime. In
principle, Article 24 allows members to reach ‘interim’ agreements so that they can
offer preferential treatment prior to the implementation of a full agreement.
The first wave of ‘regionalism’ attempted in the 1960s failed mostly because the USA,
the most powerful nation in the GATT and the chief proponent of multilateralism and
non-discrimination in global trade order, was against it. The continuous rounds of trade
talks led to mutual agreement among member states and led to more harmonized and
standardized trade policies, initially under GATT and subsequently under the World
Trade Organization. The various trade agreements under the mandate of WTO provide
a platform of enhanced trade among member states. These agreements are futuristic,
aimed at creating a peaceful world order, ensuring the participation of all, rich and
poor with Special and Differential Clauses for treatment. The spirit of these trade
agreements is aimed at promoting world trade by all means including leveraging the
regional trade agreements among member states.
Activity 1
What are the various Regional Trade Blocs to which, India has membership?
Discuss three most prominent Regional or Bilateral Trade Agreements signed by
India.
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6.5 WELFARE IMPACT OF PTAs

The resurgence of PTAs has led to renewed interest as to how PTAs have an impact
on the welfare. Conceptually, they have four general economic effects. These are
discussed as follows:
i) Income gains from greater specialization of resources and greater opportunities
for exchange within the region. These are called the static gains from regional
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 integration. The static gains from trade are the result of the elimination of the Regional Trade Blocs
dead weight losses due to tariffs and non-tariff barriers being removed. There
are the two kinds of gains; first the enhanced exchange of goods and services,
and second the enhanced specialization in the industry or work-function which
originates from the removal of trade barriers.
ii) Additional, there are growth opportunities in the long-run especially from the
economies of scale and scope, improved competitiveness of firms,
improvements in technology and inward foreign direct investment inflows.
These are called the dynamic gains from regional integration. The dynamic
gains are expected to be much larger than the static gains from trade.
iii) Transitional costs that fall in the short-run on inefficient sectors and immobile
factors, as firms rationalize and reallocate their activities throughout the region.
When prices of a regional partner are lower than those at home, opening-up
to free trade means that demand for products of the domestic industry will
fall. There can be industrial sickness resulting in exit of certain business firms
as the consumers switch-over and buy cheaper imported goods from the
PTA partner country. As firms exit or downsize leading to lay-off workers,
the workers willing to relocate find jobs quickly with the increasing business
opportunities in a RTA. Those not willing to relocate, however, may never
regain full time employment.
Thus; the free trade has transitional costs. The cost of goods and services fall
first before the accruing of prospective potential static and dynamic trade
gains. Economists express it as “short-term pain for long-term gain”.
iv) Greater economic interdependence within the region, due to the inter-linkages
created by trade and investment flows. Such economic interdependence creates
sensitivity and vulnerability to instabilities in a trading partner but also offers
potential additional gains from the multiplier effects of linkages with a faster
growing partner. For example, if the Mexican economy is more closely tied
and linked to the US economy, the more Mexico will benefit from the much
stronger US economy. Conversely, a currency crisis in Mexico will have
substantial impact on US exports to Mexico.
The welfare impacts are expected to be particularly large for small countries (note that
“small” means small in terms of the world market for a particular product so a country
could be small in one market and large in others at the same time) because they are
price-takers in world markets. These impacts are both positive and negative, but the
gains are expected to be much larger than the losses.
Small countries gain from regional economic integration:
 Removal of their own tariffs and NTBs on imports from the larger country —
As price-takers, small countries cannot affect the world price and so their
own tariffs and NTBs are simply reflected in their own (higher) domestic
prices, causing deadweight losses to national welfare. When the small country
removes its own tariffs, this creates real gains in national welfare for itself.
 Removal of the larger member country’s tariffs and NTBs against the small
country’s exports — As price-takers, small countries cannot affect the world
price so that a tariff levied by a large country falls mostly or wholly on the
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International Trade small country. This means that from small country exporters receive “LESS”
for their products in world markets. When the large country takes off its tariff,
this is a real gain for the small country.
 Gains from economies of scale and scope are likely to be very important for
small countries that join a RTA as it gains access to a much larger market. For
example, Canada joining the Canada-US FTA gained access to the 10-times
larger US market; the economies of scale from access to the larger US market
were expected to be the primary source of gains to Canada from joining the
agreement.
On the counter-arguments, some experts say that small countries lose from
regional economic integration:
 The larger gains for small countries imply larger transition costs also; and
further
 Small countries are more vulnerable once they join a PTA with a large country
since they have to adjust to changes with a system as present in the large
country.

6.6 TRADE CREATION AND TRADE DIVERSION

Let us examine the static gains from regional integration more carefully. First, the
economic welfare impacts of a PTA can be mixed; that is, it is NOT ALWAYS TRUE
that global welfare or even welfare for a member country improves as a result of a
PTA.
The impacts depend upon the following:
 Trade creation occurs when production is shifted from higher cost producers
to lower cost producers within the trading bloc. When the trade barriers are
eliminated among PTA members, differences in comparative costs will lead to
shifts in trade, production and investment patterns. According to the law of
comparative advantage, production should shift to the lower cost producers
and this would improve economic efficiency within the PTA.
 Trade diversion occurs when production is shifted to higher cost internal
producers from lower cost external producers. This is because the products
of the external producers have become uncompetitive in the internal market
due to the creation of the preferential trading area. Before the PTA both inside
and outside countries faced the same tariff barriers. Once the PTA is formed
only the outside countries face the tariff barriers. Removal of the tariff barriers
against the inside countries may give them a competitive advantage that diverts
trade and production away from the most efficient producers (the outsiders)
towards the less efficient. Thus the PTA creates inefficiencies since trade is
not with the overall lowest cost producer.
If trade creation outweighs trade diversion, economists normally argue that world welfare
will improve as a result of an FTA (that is, the static gains are, on net, positive). If trade
diversion dominates, welfare falls. It might be helpful to illustrate the concepts of trade
diversion and trade creation with an example. Assume we have three countries: Chile,
France and Germany producing and consuming apples. Assume that Chilean apples
106 cost 50 cents each, French apples are 60 cents, and German apples are 70 cents. If
there are no national tariffs, Chilean producers are the most efficient apple producers Regional Trade Blocs
and the law of comparative advantage predicts that Chile will produce and export
apples to France and Germany. The world price of apples would be 50 cents.
Suppose Germany levies a 15-cent specific tariff on all apple imports in order to protect
its domestic industry. Then Chilean apples in Germany cost 50+15 = 65 cents, and
French apples in Germany cost 60 + 15 = 75 cents. Since German apples cost 70
cents, German consumers continue to import Chilean apples at a price of 65 cents (i.e.
the tariff has reduced, but not eliminated, trade) between Germany and Chile. French
apples are not imported.
Now let us compare two cases:
 Case #1: Germany and Chile form a Customs Union
If Germany and Chile form a CU and remove tariffs between them, then
Chilean apples now cost 50 cents in Germany (since there is no tariff) while
the price of French apples remains at 75 cents (since French producers must
still pay the German tariff). German consumers buy Chilean apples, and the
price of apples returns to 50 cents. Trade creation has occurred since the
PTA generates trade with a more efficient producer. Trade creation increases
world welfare, unambiguously.
 Case #2: Germany and France form a Customs Union
If Germany and France form a CU and remove tariffs between them, then
French apples now cost 60 cents in Germany (since there is no tariff) while
the price of Chilean apples remains at 65 cents (since Chilean producers must
still pay the German tariff). German consumers buy French apples, and the
price of apples moves to 60 cents. Trade diversion has occurred since the
PTA generates trade with the less efficient producer, i.e., France. Trade diversion
may reduce world welfare.

6.7 MAJOR TRADE BLOCS IN THE WORLD

Let us now discuss some of the major trade blocs in the world.
United States-Mexico-Canada Agreement (USMCA): USMCA came into force
on July 1st, 2020 and was earlier known as North America Free Trade Agreement
(NAFTA). NAFTA was formed on January 1, 1994 and it brought immediate elimination
of tariffs on more than one half of U.S. imports from Mexico and more than one third
of U.S. exports to Mexico. NAFTA was the largest regional economic grouping of the
world and it is now replaced with USMCA. USMCA commits all parties to end
restrictions on member-countries for trade and investment policies. Foreign investors
are provided a high level of protection of intellectual property, liberalized trade in services
and there are agreements on environmental and labour standards. The US has, for
long, been demanding the reworking of provisions of trade agreements as it benefits its
trade partners much more than itself. In order to correct the trade imbalances and to
offer more beneficial trade terms for North American workers, farmers, ranchers, and
businesses, NAFTA was re-negotiated, paving the way for a progressive and futuristic
trade agreement called USMCA. USMCA Agreement creates more balanced,
reciprocal and trade supporting provision that facilitates the high-paying jobs for
Americans and growth opportunities to the entire North American economy. 107
International Trade Association of South East Asian Nations (ASEAN): It was formed in 1967 but
started making progress only in 1970s. Its members are Brunei, Indonesia, Laos,
Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. It has started
through partial liberalization of trade in select range of products. The other important
step was to identify several regional projects, which would cater to the requirements of
all the member countries. Each country will have one regional project. It is one of the
most successful regional economic groupings after European Union and has been
successful to achieve its objectives as laid down at the times of its foundation. The
basis of ASEAN success is its emphasis on three principles of cooperation; these are
security and socio-cultural and economic integration among member states.

Security

Pillars of
ASEAN’
Countries
Success
Economic Socio-Cultural
Integration Integration

Source: ASEAN Secretariat, Jakarta, Indonesia.

Figure 6.3 : Pillars of ASEAN’ Countries Success

ASEAN has made noteworthy progress in economic integration and created an

ASEAN Economic Community (AEC) by the year 2015. ASEAN Economic
Community have combined total population of over 560 million people and a gross
domestic product of over $3.2 trillion. Its GDP is further likely to reach to almost $ 5
trillion by 2027.
Asia-Pacific Economic Cooperation (APEC): Formed in 1989 as an informal
dialogue group with limited participation, APEC has become a forum for negotiations
to achieve the goal of free trade and investment in the Asia-Pacific region. APEC has
18 members– Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan,
South Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Philippines,
Singapore, Taiwan, Thailand and USA. This is though the most sweeping trade
agreement in history, committing half the world economy to eliminate all barriers among
themselves, but has limited success in practical terms.
Some other regional trade blocs are briefly described below:
Andean Community: The Andean Community is a trade bloc comprising the South
American countries of Bolivia, Colombia, Ecuador and Peru. The trade bloc was
called the Andean Pact until 1996 and came into existence with the signing of the
Cartagena Agreement in 1969. Its headquarters are located in Lima, Peru.
SAPTA: South Asian Preferential Trading Arrangement (SAPTA) is an intra-regional
trade agreement of the SAARC countries— India, Pakistan, Sri Lanka, Bangladesh,
Nepal, Bhutan, Afghanistan and the Maldives.
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SACU: The Southern African Customs Union (SACU) consists of five Member Regional Trade Blocs
States— Botswana, Lesotho, Namibia, South Africa and Swaziland. It was established
through the Customs Union Agreement of 1910.
GCC Countries: Gulf Cooperation Council is a trade bloc involving six Arabic states;
these are— Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
Activity 2
India’s first FTA was signed with Sri Lanka. Evaluate some of the gains that both
the countries have gained from this FTA? Corroborate your answer with some
industry examples.
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6.8 EUROPEAN UNION (WORLD’S LARGEST

TRADE BLOC)
History: The roots of EU go back to the Second World War. Europe was split into
East and West Europe after the world war resulting in a 40 year old long cold war.
1949: The council of Europe is created by West European nations.
18th April 1951: Six nations namely, Germany, France, Italy, the Netherlands, Belgium
and Luxemburg join hands to sign a treaty (Coals & Steel Treaty ) to run their heavy
industries.
25th March 1957: Witnessing the success of Coals & Steel Treaty, the 6 nations
expand cooperation to other economic sectors by signing the Treaty of Rome resulting
in creation of European Economic Community (EEC).
30th July 1962: The EU starts its ‘common agricultural policy’ giving the countries
joint control of food production.
20th July 1963: EU signs first big international agreement, a deal to help 18 former
colonies in Africa.
1st July 1968: The 6 nations remove customs duties on goods imported from each
other, allowing for the first time free cross-border trade.
1st July 1968: The 6 nations remove custom duties on goods allowing free cross-
border trade; world’s biggest trading group is born.
24th April 1972: The Exchange Rate Mechanism (ERM) created, which was the first
step towards the introduction of Euro, 30 years later.
24th April 1972: An Exchange Rate Mechanism (ERM) is developed wherein members
allow their currencies to fluctuate against each other within limits. This forms the
foundation of Euro.
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International Trade 1st January 1973: Denmark, Ireland and UK formally enter EU and the count
increases from six to nine nations.
10th December 1974: EU leaders set up the European Regional Development Fund
with a purpose to use the money for poor regions.
7-10th June 1979: EU citizen directly elect the members of European Parliament for
the first time.
1st January 1981: Greece joins EU making the count to 10.
28th February 1984: EU adopts ‘Esprit’ programme as the first research and
development programme to be fund.
17th February 1986: Single European launches a 6 year programme to sort out the
difference in national regulations.
7th February 1992: Maastricht Treaty signed and is considered to be a major EU
milestone. ‘European Community’ is officially replaced by ‘European Union’.
1st January 1993: Single market and its four freedoms are established. Four freedoms
are the free movement of goods, services, people and money.
1st January 1995: Austria, Finland and Sweden join the EU.
26th March 1995: The Schengen Agreement takes effect in seven countries.
17th June 1997: Signature of the Treaty of Amsterdam built on the achievements of
Maastricht treaty.
13th December 1997: The process of membership negotiations with 10 countries of
Central and Eastern Europe starts.
1st January 1999: Euro is introduced in 11 countries for commercial and financial
transactions.
29th October 2004: 25 EU countries sign a treaty establishing a European constitution.
2007: Bulgaria and Romania join the EU.
1st July 2013: Croatia joins EU.
31 January 2020: UK left the European Union in compliance to a referendum
conducted in 2016 for this effect.
Overall, The EU is the most successful regional economic grouping of the world. In the
future, it has to deal with challenges arising-out of slowing down of economic activities
due to Covid-19 pandemic, ageing population and internal bickering within the group.
Europe is facing security threat which is making it vulnerable economically and geo-
strategically.
Activity 3
Open the European Union website (www.europa.eu.) and describe the future
challenges the EU is facing with.
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 Regional Trade Blocs
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6.9 SUMMARY
A trade bloc is a Free Trade Area in which tariffs are not imposed among members,
but members keep their own external tariffs against non-members. Trade blocs have
become quite popular and account for over half of the World Trade. Trade Pacts
signed as a result of creation of such trade blocs have their own grievances settlement
mechanism.
There are six kinds of trade blocs, namely Regional Trade Blocs.
1) Preferential Trading Arrangement (PTA): Trading bloc which gives
preference to certain products from member countries.
2) Free Trade Area (FTA): In a FTA, the tariffs and non-tariff barriers are
removed for the member countries except the few items listed in the negative
list which is mutually agreed among member states.
3) Customs Union (CU): In a customs union, there is a common external tariff
for non-member states in addition to all features of FTA, i.e. abolition of tariff
and non-tariff barriers among member countries.
4) Common Market: A common market has the free movement of labour and
capital in addition to abolition of all tariff and non-tariff barriers and having a
common external tariff for non-member states.
5) Economic Union: An economic union has complete harmonization of trade,
investment, banking and monetary policies. It is the highest stage of an
economic integration.
6) Monetary Union: An arrangement where two or more countries share the
same currency.
7) Political Union: Political union is even a step ahead of economic union wherein
there is one system of political governance in addition to harmonized economic
governance under Economic Union as discussed above.
There are over 586 trade blocs operating as on December 2021. Some of the trade
blocs like European Union have developed even common currency besides common
operating parliaments and trading systems.
The major trading blocs of the world are United States-Mexico-Canada (USMCA),
earlier known as NAFTA, Association of South East Asian Nations (ASEAN), Asia-
Pacific Economic Co-operation (APEC).
Regionalism leads to specialization of resources and is accepted under WTO rules as
it ultimately leads to globalization, the central objective of rules of WTO. There is a
greater competitiveness, trade and investment flow, and regional inter-linkages with
greater scope to reallocate activities within the region.
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International Trade Small countries tend to gain more from regional trade and regional integration as a
result of trade creation and trade diversion. Regional integration in Western Europe
was initiated with the creation of European Economic Commission (EEC). In 1991,
Treaty of European Union (the Maastricht Treaty) was signed by European Commission;
the Council of Ministers changed the name to European Union. This led to creation of
Economic and Monetary Union (EMU) – with a single currency (Euro). Four bodies
govern the European Community: European Council of Ministers, European
Commission, European Parliament, and European Court of Justice. In addition to these
four organizations, European Central Bank (ECB) has also been added.

6.10 KEY WORDS

Free Trade Agreement (FTA) : It refers to Free Trade Area, i.e. abolition of
tariff and non-tariff barriers among member-
states.
Customs Union : It refers to common external tariff for non-
member states of agreed FTA members.
Common Market : Common Markets ensure free movement of
labour and capital in addition to all features
of a Custom Union.
Economic Union : The highest level of economic integration;
wherein member states have common trade,
investment and banking policies.
Political Union : A Political union is utopian state of economic
integration wherein member states have one
system of political governance, i.e. single
president, single parliament and single law, etc.
Preferential Trade : Preferential trade refers to offering tariff
preference to member states; it is the first stage
of an economic integration.
ASEAN : A trade agreement of the South East Asian
countries comprising Brunei, Indonesia, Laos,
Malaysia, Myanmar, Philippines, Singapore,
Thailand and Vietnam.
USMCA : USMCA, the world’s largest free trade area,
is an association of the three countries: the
U.S.A., Canada and Mexico.
MERCOSUR : It is a Regional Trade Agreement (RTA)
among Brazil, Argentina, Uruguay and
Paraguay, founded in 1991.
Rules of Origin : These rules may be called the rules of
determination of Origin of goods under the
Free Trade Agreement.
APEC : It is a forum for negotiations to achieve the
112 goal of free trade and investment in the Asia-
 Pacific region and its members are Australia, Regional Trade Blocs
Brunei, Canada, Chile, China, Hong Kong,
Indonesia, Japan, South Korea, Malaysia,
Mexico, New Zealand, Papua New Guinea,
Philippines, Singapore, Taiwan, Thailand and
USA.
European Union (EU) : An economic union where the countries have
a common currency, common markets and
unified EU parliament to govern the matters
of the Union.

6.11 SELF-ASSESSMENT QUESTIONS

1) What are the different types of trading blocs? What distinguishes them? Explain.
2) Compare Customs Union with Common Market and bring out clearly the
differences.
3) Explain the concepts of trade creation and trade diversion in detail, giving examples.
4) Why have trading blocs become so popular lately?
5) Write a short note on the European Union.

6.12 REFERENCES/FURTHER READINGS

 Shad Morris, James Oldroyd & Ram Singh (2021): International Business, Wiley
India Pvt. Ltd.
 John D. Daniels, Lee Radebaugh & Daniel P. Sullivan (2018): International
Business, 16th Edition, Pearson Publication.
 Ram Singh (2020): Export- Import Management, Sage Books, 1st Edition, 2020.
 Lee Kiefer and Carter Steven (2012).Global Marketing Management, Oxford
University Press.
 Charles W. L. Hill, G. Tomas M. Hult & Rohit Mehtani (2018): International
Business: Competing in the Global Marketplace (SIE), 11th Edition.
 MS-97, International Business, School of Management Studies, IGNOU, New
Delhi, November, 2015 (Reprint).

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