The Major Categories of Global Trading Blocs - Coursework Example

Global trading blocs Name Professor Institution Course Date Global Trading Blocs Business is one of the factors that shapes the competition of a country economically, political and socially. Countries normally want to enter into pact with countries that they believe can benefit them symbiotically in terms of trade (Chang & Winters 2002, p.899). However, trade among countries can also take shape with regards to the region; this is where the trading blocs come in. Trading blocs are attributed by two principle characteristics, that is; the reduction or removal of trading barriers and effective unfairness in a sense that such kind of liberalization between member states does not extend to nations outside that trading bloc. In light of these realizations, this essay assesses four major things which include summarizing the major categories of trading blocs, describing six types of economic integration, research on the Gulf cooperation council and discuss three benefits and three costs frequently associated with adoption of Certificate of Origin scheme. The Major Categories of Trading Blocs A Trading bloc is defined as a group of nations that come together in some sort of agreement with an intention to enhance trade amongst them or to benefit economically on the cooperation based on economic integration (Dalimov 2009, p.12). some of the major trading blocs are North American Free Trade Agreement (NAFTA), European Union (EU), The Association of South East Asian Nations (ASEAN) and Southern African Development Community (SADC) among others. On the other hand, Economic integration is defined as the unification of the economic policies among various countries through full or partial elimination of non-tariff and tariff constraints on trade activities amongst them before the integration (Dalimov 2011, p.276). This is carried with an aim of lowering the prices for consumers and distributors so as to increase the combined economic production of the member states. Six types of economic integration include Preferential trading area, Free Trade Areas, Custom Unions, Common markets, Economic and monetary union and Complete economic integration. Economic integration Name Definition Example Preferential trading area (PTA) This is a trading bloc which offers preferential access to particular goods from the member states (Limão 2006, p.902. They do this by lessening tariffs but not removing them fully. A PTA is normally initiated via a trade pact. It is considered as the first phase of economic integration (Bhagwati & Panagariya 1996). North American Free Trade Agreement (NAFTA), Southern African Development Community (SADC), World Trade organization (WTO) and Southern African Customs Union (SACU). Free Trade Areas this is a trading bloc whose members have set a trade agreement that abolishes import quotas, preferences and tariffs on majority (if not all) products and services that are traded (Baier, Bergstrand 2007 p.78). Nations choose this form of economic integration if they have economic structures which are complementary. It is the second phase of economic integration. ASEAN Free Trade Area (AFTA), North American Free Trade Agreement (NAFTA), Southern Common Market (MERCOSUR), G-3 Free Trade Agreement (G-3), Latin American Integration Association (LAIA) and South Asia Free Trade Agreement (SAFTA) among others. Custom Unions This is a form of trading bloc that comprises of both free trade area and the common external tariff (Limão 2006, p.899). The participant state formulates a common trade policy which is external in nature, though in some situations they employ diverse import quotas. Customs union is initiated by means of trade pacts. It is regarded as the third phase of economic integration. East African Community (EAC), Southern Common Market (MERCOSUR), Caribbean Community and Common Market (CARICOM) and Customs Union of Belarus, Russia and Kazakhstan. Common markets A Common market is a sort of trading bloc that comprises of free trade area for products with shared policies on freedom of movement and product regulation of the production factor (labor and capital) and of services and enterprise (Bhagwati & Panagariya 1996). The objective of creating common market is to facilitate easy movement of goods, services, capital and labor between the member countries. South Asian Free Trade Area (SAFTA), Switzerland – European Union, Canada – Agreement on Internal Trade (AIT) Mercado Comun del Sur (MERCOSUR), Southern African Customs Union (SACU), East African Community (EAC) Economic and monetary union This is a trading bloc composing of an economic union that is customs union and common market as well as monetary union (Dixit 2009, p.12). It is the fifth phase of the economic integration. Economic and Monetary Union of the European Union (1999/2002), Gulf Cooperation Council (GCC) and de facto Monaco – Eurozone Complete economic Integration The Complete economic integration considered the last stage of the economic integration. After this type of trading bloc, the integrated entities lack no control of economic policy as well as complete monetary union and full or near-full fiscal policy harmonization (World Bank 2000). In a nutshell it is the harmonization of monetary counter-cyclical and social policies which need a binding supra-national arrangement. European Union (EU) Gulf Cooperation Council Gulf cooperation council is an economic and political trading bloc of Arab countries within the Persian Gulf consisting of Bahrain, Oman, Kuwait, Qatar, the United Arab Emirates and Saudi Arabia (Low, Salazar & Lorraine 2011, p.41). According to Ibrahim & Choucair (2009), this regional organization was formed on 25 of May 1981 in Abu Dhabi to promote the member countries’ economic, social and political institutions. It should be noted that not every country that is neighboring Persian Gulf is a member of this council; examples are Iraq and Iran. Discussions have taken place in the past concerning the membership of Yemen, Jordan and Morocco. However, Yemen is currently in negotiation with GCC secretariat and intends to join the trading bloc by 2016 (Low, Salazar & Lorraine 2011, p.41). Based on similar characteristics of the member countries, the Foreign Ministers of these six countries conducted a meeting in the capital of Saudi Arabia, Riyadh, in February, 1981 and agreed to institute a council for collaboration between the countries of the Persian Gulf. Khan (2010) argues that the achievement of this convention created the foundation on which Gulf cooperation council was formed. Nearly one month later, the first GCC summit was organized in Abu Dhabi, UAE. It was from this convention that members agreed to hold GCC conventions on an annual basis. The launch of the Gulf cooperation council in May 1981 worked as the climax of the serious attempts inspired with confidence on the GCC’s objectives and reliability of its aspiration for political and rational efforts starting from the late 1970s (Khan 2010). Thus, the creation of the Council was observed as the achievement of the major vision of the nationals of GCC member countries. This was anchored in the combined efforts towards economic, political and social integration referred to as the Gulf Unity (Al Faris 2010, p.8). The Gulf Unity is capable of preventing the various challenges that emerges and opposes its existence or which threaten one or some of its member states at the local, regional and international levels. Al Faris (2010, p.12) posits that the objectives that led to the formation of this regional trading bloc includes establishing same regulations in different areas such as finance, trade, religious, customs, legislation, administration and tourism. With increased industrial operations in the region, formation of the GCC was intended to set up scientific research centers and foster technical and scientific growth in industry, agriculture and mining (Ibrahim & Choucair 2009). Another aim was to put up a joint military presence and also to establish a common currency. The physical attributes of the GCC countries and the similarity of their economic and societal factors, laws, and the feature of modern challenges are some of the issues which led to the creation of this trading bloc. Khan (2010, p.87) the GCC economy is one of the fast-expanding global markets and has become gradually more critical to the global economy. Some significant achievements of the Gulf cooperation council are the formation of a joint military venture based in Saudi Arabia, the set up of Peninsula Shield Force, the agreement of the intelligence-sharing deal in 2004, Economic Stability, good foreign investor attitude and Trade integration and Economic Philosophy in GCC economies among others (Ibrahim & Choucair 2009. In 2003 Gulf cooperation council member countries removed the trade tariffs between themselves and initiated external common tariffs. They agreed to set up an extensive economic organization to include a common currency and market. This did not go well with United Arab Emirates and Oman, so they opted out (Khan 2010, p.86). This did not stop the plan and in 2008 a common market was set up. Another step ahead is that during the riots and protests named the Arab Spring which took place in 2011, the GCC sent its forces to Bahrain with the support of its leadership, and tried to negotiate a decision in Yemen (Low, Salazar & Lorraine 2011, p.41). The GCC markets has had a perceptible level of success with regards of trade integration, labor creation, capital mobility, and setting up regular standards in different regulation fields (Al Faris 2010, p.21). Some of the council member states have widened cordial freedoms to foreign investment and capitals in areas like share-market, government procurement and investment. GCC countries have been posting positive GDP increase rates even during global recession. The World Bank estimated combined nominal GDP to have reached $1.55 trillion in 2012. This is projected to even go higher by 2018. The Saudi American Bank projects that total investment of the council economies might reach 670 million dollars by 2018. The GCC members have attained stability because their common denominator is oil and gas (Al Faris 2010, p.27). The governments' revenues and expenditures come mostly come from oil and gas which act as the engine of these countries’ economy. Low, Salazar & Lorraine (2011, p.41) state that one on GCC the member, Qatar has been picked to host the 2022 FIFA World Cup. This will be a major boost to the economy of this trading bloc. Even though the trading bloc has achieved a lot of success, it equally faces several challenges such as non-commitment from its members, Trade Protection and Competitiveness, Lack of diversification and The Changing Economic Context of Gulf Politics (World Bank 2000). In 2009, The GCC announced the intention to create a common currency that members will use in their transactions (Low, Salazar & Lorraine 2011, p.41). This plan was to be realized by 2010. However, UAE and Oman did not show commitment and later withdrew from the common currency plan. The custom union agreement was reached in 2003, but adoption has not been effective. In fact, after this agreement, Bahrain entered into another Free Trade Agreement with the United States, an agreement which caused much friction because it cut through the GCC's agreement (Al Faris 2010, p.16). Certificate of Origin scheme As a trading bloc GCC initiated a custom union protocol which ensures that every member is issued a Certificate of Origin on goods it exports (Dixit 2009, p.11). This document has its benefits to the council. These benefits include council identity, valuation of goods and competitive advantage. Council identification Under the GCC Scheme, the exporter is needed to obtain Certificates of Origin based on council’s FTAs from the authorized body that is Chambers of commerce from their countries (Khan 2010, p.91). As such this certificate helps exporter belonging to member country to identify themselves with GCC. Establishing the origin of the products and identification with a trading bloc is critical because it is a major reason for using the tariff and other significant criteria. The GCC Protocols of its FTA has its rule for every manufactured goods, with regards to its Harmonized Tariff Schedule code (Low, Salaza & Lorraine 2011, p.41). When this is manifested in certificate of origin it will be easy to calculate whether the manufactured goods have preferential origin. Failure to provide this document in the appropriate form is considered as a non-conforming to the agreement. Thus, the document can be regarded as a symbol of the council identification, the warranty of the title to goods, conformity to the protocol between the exporter and importer and the key proof to solve the rows in future (Ibrahim & Choucair 2009). Valuation of goods It is a good practice to declare the value of goods one is exporting or importing. Low, L., Salazar & Lorraine, (2011, p.41) claim that this practice is encouraged by the GCC council so as reduce unfair practices within their markets. As part of the customs duties practices under the GCC protocols, exporters from member countries are encouraged to attach certificate of origin declaring the value of good being exported. Sullivan & Steven (2003, p.450) posit that declaring value of goods means adhering to the standard set which will then make it easier for authorities to calculate the customs duty. Competitive advantage Certainly, exporters from GCC member countries frequently benefit from preferential prices that are lower compared to that of non-member companies. GCC certificate origin also acts as a competitive element because it allows only members to benefit from set tariffs while charging non-members at a high rate (Ibrahim & Choucair 2009). With certificate showing that goods are from GCC member, it is also easy for a company from a member country to set up a company or a business in another GCC country compared to non-member. Several companies have taken advantage of this certificate and are expanding into Bahrain and United Arab Emirates. Cost associated with Adoption of certificate of origin scheme However there are certain costs that are associated with this certificate; this includes the cost of goods exported, the cost of producing goods and import duties or tariff. The cost of goods According to Sullivan & Steven (2003, p.450) pricing product appropriately, giving accurate and complete quotations are critical factors in selling a goods oversea markets. The exportation rules state the limit to which a country can import goods (Wyplosz 2006, p.267). Therefore, certificate of origin enables the authority to know whether the exporter have conformed to the set rules. This allows domestic businesses also to sell their goods without unfair competition. The cost of producing of goods Dixit (2009, p.17) asserts that a frequently employed under certificate of origin practice in the global business has been that if over 50 percent of the cost of manufacturing the goods comes from one nation, then, that state is acknowledged as the state of origin. The calculation of the cost of manufacturing a product and transporting into the market is a major factor in determining if exportation is economically viable (Limão 2006, p.906). This rule promotes balance of trade to both countries of origin and the destination. This rule also has its disadvantages because it lays bear the secrets of a business making the opponents to take advantage (Bhagwati & Panagariya 1996). Import duties or tariff As globalization takes shape in the world markets, countries must step up the regulations and rules on market entry so as to protect its domestic businesses (Baier & Bergstrand 2007, p.77). This will ensure that other countries do not find an easy way to dump their poor goods in another market. As such competitive import duties or tariff must be issued to any business that is exporting its products in another country. However, for countries within a trading bloc, they normally set certain a favorable tariff which member countries enjoy. This is no difference for GCC member who enjoys free trade in other member country as long as the business has Certificate of origin showing the origin of goods, cost and value (Low, Salazar & Lorraine 2011, p.41). However, free trade associated with GCC tariff may not be viable because excessive importation of goods by a country is likely to kill its domestic businesses and young companies. Conclusion While globalization has increased the level of competition in business platform, trading blocs have also played part to ensure that the business activities of a certain region are recognized. It is true that trading blocs help reduce the trade barriers among the countries, but the free trade must not allowed to threaten the freedom a country to harmonize their goods and services to the controlled preferences. On the other hand, countries that are not well developed must take advantage of trading blocs and economic integration to grow its economy and better the lives of its citizens. 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