4.1.5a Types and benefits of trading blocs

Trading Blocs

1. Agreements can be bilateral, between two countries, or regional, between several countries in an area.
2. Integration deepens in stages from shallow to deep, so blocs are not all the same and the deeper the bloc, the more sovereignty members pool.

Types of trading bloc

1. USMCA (formerly NAFTA) in North America is a free trade area between the United States, Canada and Mexico.
2. MERCOSUR in South America operates as a customs union with a common external tariff.
3. The EU is a customs union with a common external tariff, and its single market is a common market allowing the free movement of goods, services, capital and labour across member states.
4. The eurozone is a monetary union sharing the euro and a single central bank.
5. ASEAN in South East Asia is a free trade area that is moving towards a deeper common market.

Monetary union and the eurozone

1. In a monetary union members share one currency, so one central bank sets a single interest rate for all.
2. Members gain exchange-rate certainty, lower transaction costs and price transparency, which encourages intra-bloc trade and investment.
3. But members lose their own monetary policy and can no longer devalue to regain competitiveness, so a downturn in one member cannot be met with a tailored interest rate or a weaker currency.
4. Success needs converged, similar economies, easy labour mobility between members, heavy trade with each other and exposure to similar shocks, so that one interest rate suits all.
5. The eurozone meets these conditions only partly, as labour mobility is low and members differ widely, e.g. the Greek debt crisis showed the strain when a struggling member cannot devalue.

Costs and benefits of trade agreements

1. Joining raises welfare only if trade creation outweighs trade diversion.
2. Members also gain wider markets, economies of scale, more competition and inward investment, e.g. Japanese carmakers building plants inside the EU and Mexico for tariff-free access.
3. But members give up some policy independence, contribute to a common budget and face costly adjustment in some industries.

Do trading blocs raise a country's welfare?

1. They can raise welfare because trade creation, larger markets, economies of scale and inward investment lower prices and lift growth for members.
2. But trade diversion can leave consumers buying dearer partner goods, outsiders lose access, and deeper blocs cost members monetary and fiscal independence.
3. On balance the net effect depends on whether trade creation exceeds trade diversion, on the country's trade structure, and on how well the bloc's members are converged.

4.1.5b Role of the WTO and conflicts

Role of the WTO

1. The WTO succeeded the earlier GATT framework and aims for multilateral free trade on non-discriminatory terms.

What the WTO does

1. It negotiates multilateral agreements to lower tariffs and other trade barriers, working through successive rounds such as the Uruguay round that created the WTO in 1995.
2. It applies the principle of non-discrimination through the most-favoured-nation rule, so a tariff cut offered to one member must be offered to all.
3. It sets and enforces the rules of international trade that members agree to follow.
4. It runs a dispute settlement process and can authorise retaliation when a member breaks the rules, e.g. the long-running dispute between the USA and the EU over subsidies to Boeing and Airbus, and cases brought by the USA against China over tariffs and intellectual property.
5. Its enforcement has weakened since the USA blocked new appointments to the Appellate Body from 2019, which has paralysed the appeals stage of dispute settlement.
6. But recent rounds, such as the Doha round, have stalled, showing how hard multilateral deals are when interests differ between advanced and developing members.

Conflicts with trading blocs

1. Regional trade agreements, such as the EU single market and the USMCA agreement between the USA, Mexico and Canada, cut tariffs among their own members only.
2. This can divert trade away from more efficient outside producers, lowering global welfare.
3. So blocs favour members over outsiders, which pulls against the WTO's non-discriminatory multilateral goal.
4. The growing number of regional agreements complicates the drive for multilateral free trade.
5. Bilateral tariff disputes can also strain the system, e.g. the row over the steel and aluminium tariffs imposed by the USA in 2018 and the retaliatory tariffs applied by the EU.

Do regional trade blocs undermine the WTO?

1. They can act as building blocks because they liberalise trade quickly among members and can later be widened into larger multilateral deals.
2. But they can be stumbling blocks because they discriminate against outsiders, cause trade diversion and sap the political momentum for a single global agreement.
3. On balance it depends on whether blocs keep low external tariffs and stay open to new members, in which case they complement rather than undermine multilateral liberalisation.