International Trading Blocs - Assignment Example

International Trading Blocs Preferential Trade Agreements (PTAs) Preferential Trade Agreements or trading blocs are a form of economic integration inwhich countries agree to create a free trade area or some form of common market to facilitate trade. This agreement can be in different forms and depths, for instance there is Free Trade Area is a trading bloc that has no tariff, then Custom Union is where there is common level of trade barriers, in Economic unions such as European Union, the member countries have open national policies and a common currency (Euro). There are several forms of regional trade areas, varying according to the extent to which countries extend cooperation and provide concessions to their member countries. For instance Free Trade Agreements eliminate all tariffs for countries in the agreement; PTA provides preferential treatment to its trading allies. TRIAD refers to three regional free-trade blocs which include NAFTA (USA, Mexico and Canada), EU (27 nations primarily located in Europe) and ASEAN (10 Asian countries). These are also grouped around some common currencies (the euro, the yen and the dollar) According to Fan Zhai (2006) by 2005 in Asia, there were 18 bilateral trade agreements and at least 30 new preferential trade agreements. The graph below is a glimpse of different regional trade agreements in Asia. Recent trends Trade diplomacy is now a part of the relationship that a country shares with another. After the establishment of WTO, 20 PTAs are formed on average on yearly basis. However one can notice the decline in regional cooperation, as cross-regional agreements are increasing in number. According to Heydon Ken (2010) over half of the world’s trade is through preferential trade agreements. Countries that get involved in these trade agreements have preference for speed and responsiveness. Bilateral agreements are preferred over multilateral agreements due to ease of enforcement and require less negotiation. Zhai (2006) reports that the new PTAs in Asia agree on more that tariff and non-tariff policies, rather they include provisions on nvestment liberalization, services, assistance in trade and technical and economic collaboration. The graph below shows the drastic rate at which the number of PTAs are increasing. Benefits of PTAs The foremost reason for creating a PTA is to gain concessions in trade with member countries. Being in a PTA implies that the member countries will get preference over other non-member countries. This removal of barriers of trade has a number of inherent benefits. These can be in several forms, such as: Economies of scale In countries that are located nearby each other, having preference can also benefit through lower transportation costs. Japan-Singapore Economic Partnership Agreement (JESPA) is an agreement in which both the nations have promised coordination in technology, regulatory, e-commerce, media and broadcasting, and human resources. This will benefit the multinational companies in both the countries because they can take benefit of economies of scale at regional level. Tax benefits Countries in PTA agree to trade with member countries at low tariffs, but do not abolish them; this reduces the cost of trade. The loss of tax revenue from import duties can be made up by more trade and more taxes from increased activity in the country. More trade Integration of international markets through reduction in tariffs and other barriers have led to reduction in the cost of trade. Thus countries can now concentrate on their production facilities only and produce those goods in larger quantities in which they have absolute or comparative advantage. More trade is expected to raise the standard of living of people in countries. Hub and Spoke structure The hub and spoke structure works in a way that several smaller vehicles (spoke), remain individually managed but pool their assets to contribute to a central investment vehicle (hub). So the well established businesses become the hub and can give a few countries preferential treatment to a few countries based on PTAs. Economic Partnership agreement is an example in which European Union and some African countries have agreed to promote development in sub-Saharan Africa. However this development will take place in only selected countries. Now the hub and spoke paradigm is that one country (the hub) does a number of PTAs at the same time with individual countries (spoke), while the spokes usually don’t do PTA with each other. This gives an undue advantage to the hub country, which is usually already economically stable and wealthy compares to its spokes. This also creates trade diversion rather that trade creation (Zhai 2006). In addition, since the access to markets is unequal, it creates investment opportunities in the hub country on the resources taken from spokes. The dilemma of spoke countries is that due to political reliance on stronger nations and lack of stability they fail to attract such investment. Moreover even spoke countries do not create FTAs or liberalize trade for all due to political pressures from within and abroad. Zhai (2006) says that ASEAN is trying to establish itself as a hub because the ASEAN countries don’t want to be trapped as spoke countries. It wants to be a regional hub, as is reflected by its negotiations of bilateral PTAs with Australia, New Zealand, United States, Japan etc. But due to the differences among ASEAN countries and the fact that usually the opposing country is stronger, it is very unlikely that ASEAN will become the hub, and might end up being the spoke. Moreover, even the ASEAN countries don’t have as much coordination and often come into bilateral trade agreements with non-ASEAN countries rather that creating free trade are among them. India has the potential to become the hub in most of PTAs because of its size and resources. Its “look East policy” has potential of bringing advantage to its forte. It is strong in software and has signed FTA agreements with ASEAN in 2003, which has manufacturing as it strength. Criticisms PTAs can have negative influence on international trade of they cause trade diversion rather than trade creation (Viner 1950). This means that the spirit of free trade is killed when countries fail to increase their trade and production, and instead import goods from those countries with which they have signed PTAs. Critics also say that regionalism will undermine the benefits of global multilateral liberalization. A major criticism on trade agreements is that although the tariff barriers have been removed, but a number of other barriers still remain which hinder free flow of goods, for instance environment labeling, direct taxes, minimum wages, transportation costs, exchange rates conversion costs etc. Transaction cost also increase in international trade as compared to domestic trade, this is because the element of trust takes more time to build up and firms often waste a lot of resources trying to negotiate, come to each other’s terms and to create long-term relationship with each other. Moreover there is no way to confirm whether an individual nation will benefit from trade or will it be exploited by the stronger nation. For instance through NAFTA, although Mexico’s trade did increase but it created large scale economic inequality in the country, where the rich became richer through investment but poor and unskilled laborers found it more difficult to find work, and unemployment and crime rate increased. Conclusion Regional trade agreements have their own pros and cons. Countries are looking for new patterns of cooperation, be it regional or based on resources and competitive advantage. Bonapace Tiziana and Mikic Mia suggest that there is strong evidence from European Union that a country that is left out from the trading bloc loses prospects for business and investment. Yet we can also see that nations that are already strong benefit the most from economic integration and gain benefits at the toil of economically weaker nations. For countries to benefit the most, it is important to build trust amongst them and have consistent policies. Due to the increase in the number of these trading blocs the fragmentation in regions is increasing, so there is a need to build on the existing alliances. Increased trade has huge potential of improving living standards and increasing development the world over. It is through trade that new opportunities can be built and the current conflicts between a number of nations can be resolved. Increased regional integration can have wide ranging benefits for member countries. Bibliography Bonapace Tiziana and Mikic Mia MULTILATERALIZING REGIONALISM: TOWARDS AN INTEGRATED AND OUTWARD-ORIENTED ASIA-PACIFIC ECONOMIC AREA [Report]. - [s.l.] : http://www.unescap.org/tid/publication/tipub2393_chap3.pdf. Heydon Ken The rise of bilateralism: implications for ASEAN, and beyond [Online] // East Asia Forum. - feb 1, 2010. - Mar 28, 2011. - http://www.eastasiaforum.org/2010/02/01/the-rise-of-bilateralism-implications-for-asean-and-beyond/. Zhai Fan PREFERENTIAL TRADE AGREEMENTS IN ASIA: ALTERNATIVE SCENARIOS OF “HUB AND SPOKE” [Report]. - http://www.adb.org/Documents/ERD/Working_Papers/WP083.pdf : ERD Working Paper, Asian Development Bank, 2006. Read More