Question

Regional trading blocs, such as the European Union (EU) and NAFTA, are growing in importance. Why do you think this is so - what do countries gain from joining a regional trading bloc? What the implications of these trading blocs for international business? Are they helpful or harmful? How might they affect a firm's investment decision?

Answer 1

Regional Trading Bloc

Regional Trading Bloc is an association of countries located in the same geographical area. This group is meant for securing these nations from importing of goods from non-members of Regional Trading Bloc. Now-a-days its importance has been rising because it helps to shape the world trade model. Here, barriers of trade will be decreased between the member nations. European Union(EU), North American Free Trade Agreement (NAFTA), Pacific Alliance, Mercosur are example of Regional Trading Bloc.

European Union is a customs union and a single currency market. NAFTA consists of nations such as Canada, Mexico and USA.

What do countries gain from joining a regional trading bloc?

Regional Trading Bloc is very important because it helps to maintain high growth and development of the economy by boosting economies to scale. This gives the member nations, the confidence to trade domestic products in their own countries. Heavy production of domestic products will lead to huge market formation which ultimately results in reduced costs. This is the reason for increase in economies to scale.

Implications of Regional trading blocs are:-

• Free trade area
• Common market
• Economic union
• Customs union

Are they helpful or harmful?

Even though they are useful, there are certain limitations for Regional trading blocs:-

• A nation which joins the bloc should make certain concessions.
• Members may suffer complete or partial loss of sovereignty.
• Member nations will become more dependent to each other.
• Regional trading bloc will permanently support and gave assistance to their member nations only.

How might they affect a firm's investment decision?

Regional trading bloc helps the member nations to make investments in foreign countries also. They prevent the trade barriers for investment. Tariff removal will help to lower the prices of products in these countries. Less developed member nations are the most utilizers of this benefit. Also, this bloc helps to avoid constrictions on labor movement and thus the unity of the economy will helps for getting jobs also.

Hence, uses of Regional trading blocs are:-

• Competition
• Eliminating tariffs
• Increased foreign direct investment
• Development in efficiency of market