UNIT-2

CONTENTS

Overview of India & World Trade EXIM Policy

Foreign Trade Policy and Regulation
International Market Place & Space, Barriers
International Politics & Economic Integration, Trade Blocks

Overview of India & World Trade EXIM Policy

Export means trade across the political boundaries of different nation. No Nation is self
sufficient and had all the goods that it needs. This happens because of climatic variation &
unequal distribution of natural resources. As a result, countries all over the world have become
interdependent, which necessitated foreign trade. A developing country like India with its fast
growing agricultural production to keep pace with the population to keep pace with the
population growth and growing Industrial infrastructure needs high-import and this can be
sustained only with fast export growth. To meet the oil import bill, export is unavoidable. Thus,
it is evident that export promotion continues to be a major thrust area for the government.
Several measures have been under taken in the past for improving export performance of the
country. In India, Govt. has come out from time to time with various policies on foreign trade to
promote export thereby increasing the Foreign Exchange Reserve. These policies are termed
as Exim Policy

Brief history
Import export act was introduced by government during second world war and it lasted for
around 45 yrs and in June 1992 this act was superseded by the Foreign Trade (Development
& Regulation Act), 1992. The basic objective of this new act was to give effect to the new
liberalized export and import policy of the Govt. till 1985 annual policies were made but
from 1985-92, three yr policy was made and then 5 yr policy was made coinciding with 5 yr
plans 1992-97, 1997-02, 2002-07.
What is Exim Policy?
It contains policies in the sphere of foreign trade i.e. with respect to import & export from the
country and more especially export promotion measures, policies and procedure related
thereto.
Export means selling abroad and import as bringing into India, any goods and services

Objective of Exim Policy

Accelerating the countrys transition to a globally oriented vibrant economy with a view to
derive maximum benefits from expanding global market opportunities;
Stimulating sustained economic growth
 Enhancing the technological strength and efficiency
Encouraging the attainment of internationally accepted standards of quality
Providing consumers with good quality products and services at reasonable prices.

General provisions regarding export import

Exports and Imports free unless regulated
Compliance with Laws
Interpretation of Policy
Procedure:
Exemption from Policy/ Procedure
Principles of Restriction
Restricted Goods
Terms and Conditions of a Licence
Importer-Exporter Code Number
Exemption from Bank Guarantee
Clearance of Goods from Customs

Export Promotion Measures

Policy measures
Institutional set up.
Import Facilitation for Export Production.
Cash subsidies.
Fiscal Incentives.
Foreign Exchange Facilities.
Export incentives
Export production units

Import Facilitation for Export Production

Export Promotion Capital Goods Scheme

Special Import Licenses
Duty Free Licenses under Duty Exemption Scheme

Duty free licenses are issued as:

Advance license
Advance Intermediate license.
Special Imprest licence.
License for jobbing, repairing etc. for re-export.
License under export production programme.
Advance Release Order.
Back to Back Inland Letter of Credit.

Export Incentives
International Market Place & Space, Barriers
Ever since ADAM SMITH published The Wealth of Nations in 1776, the vast majority of
economists have accepted the proposition that FREE TRADE among nations improves overall
economic welfare. Free trade, usually defined as the absence of tariffs, quotas, or other
governmental impediments to INTERNATIONAL TRADE, allows each country to specialize in the
goods it can produce cheaply and efficiently relative to other countries. Such specialization
enables all countries to achieve higher real incomes.

Although free trade provides overall benefits, removing a trade barrier on a particular good hurts
the shareholders and employees of the domestic industry that produces that good. Some of the
groups that are hurt by foreign COMPETITION wield enough political power to obtain protection
against imports. Consequently, barriers to trade continue to exist despite their sizable economic
costs. According to the U.S. International Trade Commission, for example, the U.S. gain from
removing trade restrictions on textiles and apparel would have been almost twelve billion dollars
in 2002 alone. This is a net economic gain after deducting the losses to firms and workers in the
domestic industry. Yet, domestic textile producers have been able to persuade Congress to
maintain tight restrictions on imports.

While virtually all economists think free trade is desirable, they differ on how best to make the
transition from tariffs and quotas to free trade. The three basic approaches to trade reform are
unilateral, multilateral, and bilateral.

Some countries, such as Britain in the nineteenth century and Chile and China in recent decades,
have undertaken unilateral tariff reductionsreductions made independently and without
reciprocal action by other countries. The advantage of unilateral free trade is that a country can
reap the benefits of free trade immediately. Countries that lower trade barriers by themselves do
not have to postpone reform while they try to persuade other nations to follow suit. The gains
from such trade liberalization are substantial: several studies have shown that income grows
more rapidly in countries open to international trade than in those more closed to trade. Dramatic
illustrations of this phenomenon include Chinas rapid growth after 1978 and Indias after 1991,
those dates indicating when major trade reforms took place.

For many countries, unilateral reforms are the only effective way to reduce domestic trade
barriers. However, multilateral and bilateral approachesdismantling trade barriers in concert
with other countrieshave two advantages over unilateral approaches. First, the economic gains
from international trade are reinforced and enhanced when many countries or regions agree to a
mutual reduction in trade barriers. By broadening markets, concerted liberalization of trade
increases competition and specialization among countries, thus giving a bigger boost to
EFFICIENCY and consumer incomes.

Second, multilateral reductions in trade barriers may reduce political opposition to free trade in
each of the countries involved. That is because groups that otherwise would oppose or be
indifferent to trade reform might join the campaign for free trade if they see opportunities for
exporting to the other countries in the trade agreement. Consequently, free trade agreements
between countries or regions are a useful strategy for liberalizing world trade.
The best possible outcome of trade negotiations is a multilateral agreement that includes all
major trading countries. Then, free trade is widened to allow many participants to achieve the
greatest possible gains from trade. After World War II, the United States helped found the
General Agreement on Tariffs and Trade (GATT), which quickly became the worlds most
important multilateral trade arrangement.

The major countries of the world set up the GATT in reaction to the waves of PROTECTIONISM
that crippled world trade duringand helped extendthe GREAT DEPRESSION of the 1930s. In
successive negotiating rounds, the GATT substantially reduced the tariff barriers on
manufactured goods in the industrial countries. Since the GATT began in 1947, average tariffs
set by industrial countries have fallen from about 40 percent to about 5 percent today. These
tariff reductions helped promote the tremendous expansion of world trade after World War II and
the concomitant rise in real per capita incomes among developed and developing nations alike.
The annual gain from removal of tariff and nontariff barriers to trade as a result of the Uruguay
Round Agreement (negotiated under the auspices of the GATT between 1986 and 1993) has
been put at about $96 billion, or 0.4 percent of world GDP.

In 1995, the GATT became the World Trade Organization (WTO), which now has more than
140 member countries. The WTO oversees four international trade agreements: the GATT, the
General Agreement on Trade in Services (GATS), and agreements on trade-related
INTELLECTUAL PROPERTY rights and trade-related INVESTMENT (TRIPS and TRIMS,
respectively). The WTO is now the forum for members to negotiate reductions in trade barriers;
the most recent forum is the Doha Development Round, launched in 2001.

The WTO also mediates disputes between member countries over trade matters. If one countrys
government accuses another countrys government of violating world trade rules, a WTO panel
rules on the dispute. (The panels ruling can be appealed to an appellate body.) If the WTO finds
that a member countrys government has not complied with the agreements it signed, the
member is obligated to change its policy and bring it into conformity with the rules. If the
member finds it politically impossible to change its policy, it can offer compensation to other
countries in the form of lower trade barriers on other goods. If it chooses not to do this, then
other countries can receive authorization from the WTO to impose higher duties (i.e., to
retaliate) on goods coming from the offending member country for its failure to comply.

As a multilateral trade agreement, the GATT requires its signatories to extend most-favored-
nation (MFN) status to other trading partners participating in the WTO. MFN status means that
each WTO member receives the same tariff treatment for its goods in foreign markets as that
extended to the most-favored country competing in the same market, thereby ruling out
preferences for, or discrimination against, any member country.

Although the WTO embodies the principle of nondiscrimination in international trade, article 24
of the GATT permits the formation of free-trade areas and customs unions among WTO
members. A free-trade area is a group of countries that eliminate all tariffs on trade with each
other but retain autonomy in determining their tariffs with nonmembers. A customs union is a
group of countries that eliminate all tariffs on trade among themselves but maintain a common
external tariff on trade with countries outside the union (thus technically violating MFN).
The customs union exception was designed, in part, to accommodate the formation of the
European Economic Community (EC) in 1958. The EC, originally formed by six European
countries, is now known as the EUROPEAN UNION (EU) and includes twenty-seven European
countries. The EU has gone beyond simply reducing barriers to trade among member states and
forming a customs union. It has moved toward even greater economic integration by becoming a
common marketan arrangement that eliminates impediments to the mobility of factors of
production, such as capital and labor, between participating countries. As a common market, the
EU also coordinates and harmonizes each countrys tax, industrial, and agricultural policies. In
addition, many members of the EU have formed a single currency area by replacing their
domestic currencies with the euro.

The GATT also permits free-trade areas (FTAs), such as the European Free Trade Area, which is
composed primarily of Scandinavian countries. Members of FTAs eliminate tariffs on trade with
each other but retain autonomy in determining their tariffs with nonmembers.

One difficulty with the WTO system has been the problem of maintaining and extending the
liberal world trading system in recent years. Multilateral negotiations over trade liberalization
move very slowly, and the requirement for consensus among the WTOs many members limits
how far agreements on trade reform can go. As Mike Moore, a recent director-general of the
WTO, put it, the organization is like a car with one accelerator and 140 hand brakes. While
multilateral efforts have successfully reduced tariffs on industrial goods, it has had much less
success in liberalizing trade in agriculture, textiles, and apparel, and in other areas of
international commerce. Recent negotiations, such as the Doha Development Round, have run
into problems, and their ultimate success is uncertain.

As a result, many countries have turned away from the multilateral process toward bilateral or
regional trade agreements. One such agreement is the North American Free Trade Agreement
(NAFTA), which went into effect in January 1994. Under the terms of NAFTA, the United
States, Canada, and Mexico agreed to phase out all tariffs on merchandise trade and to reduce
restrictions on trade in services and foreign investment over a decade. The United States also has
bilateral agreements with Israel, Jordan, Singapore, and Australia and is negotiating bilateral or
regional trade agreements with countries in Latin America, Asia, and the Pacific. The European
Union also has free-trade agreements with other countries around the world.

The advantage of such bilateral or regional arrangements is that they promote greater trade
among the parties to the agreement. They may also hasten global trade liberalization if
multilateral negotiations run into difficulties. Recalcitrant countries excluded from bilateral
agreements, and hence not sharing in the increased trade these bring, may then be induced to join
and reduce their own barriers to trade. Proponents of these agreements have called this process
competitive liberalization, wherein countries are challenged to reduce trade barriers to keep up
with other countries. For example, shortly after NAFTA was implemented, the EU sought and
eventually signed a free-trade agreement with Mexico to ensure that European goods would not
be at a competitive disadvantage in the Mexican market as a result of NAFTA.
But these advantages must be offset against a disadvantage: by excluding certain countries, these
agreements may shift the composition of trade from low-cost countries that are not party to the
agreement to high-cost countries that are.

Suppose, for example, that JAPAN sells bicycles for fifty dollars, Mexico sells them for sixty
dollars, and both face a twenty-dollar U.S. tariff. If tariffs are eliminated on Mexican goods, U.S.
consumers will shift their purchases from Japanese to Mexican bicycles. The result is that
Americans will purchase from a higher-cost source, and the U.S. government receives no tariff
revenue. Consumers save ten dollars per bicycle, but the government loses twenty dollars.
Economists have shown that if a country enters such a trade-diverting customs union, the cost
of this trade diversion may exceed the benefits of increased trade with the other members of the
customs union. The net result is that the customs union could make the country worse off.

Critics of bilateral and regional approaches to trade liberalization have many additional
arguments. They suggest that these approaches may undermine and supplant, instead of support
and complement, the multilateral WTO approach, which is to be preferred for operating globally
on a nondiscriminatory basis. Hence, the long-term result of bilateralism could be a deterioration
of the world trading system into competing, discriminatory regional trading blocs, resulting in
added complexity that complicates the smooth flow of goods between countries. Furthermore,
the reform of such issues as agricultural export subsidies cannot be dealt with effectively at the
bilateral or regional level.

Despite possible tensions between the two approaches, it appears that both multilateral and
bilateral/regional trade agreements will remain features of the world economy. Both the WTO
and agreements such as NAFTA, however, have become controversial among groups such as
antiglobalization protesters, who argue that such agreements serve the interests of multinational
CORPORATIONS and not workers, even though freer trade has been a time-proven method of
improving economic performance and raising overall incomes. To accommodate this opposition,
there has been pressure to include labor and environmental standards in these trade agreements.
Labor standards include provisions for MINIMUM WAGES and working conditions, while
environmental standards would prevent trade if environmental damage was feared.

One motivation for such standards is the fear that unrestricted trade will lead to a race to the
bottom in labor and environmental standards as multinationals search the globe for low wages
and lax environmental regulations in order to cut costs. Yet there is no empirical evidence of any
such race. Indeed, trade usually involves the transfer of technology to developing countries,
which allows wage rates to rise, as Koreas economyamong many othershas demonstrated
since the 1960s. In addition, rising incomes allow cleaner production technologies to become
affordable. The replacement of pollution-belching domestically produced scooters in India with
imported scooters from Japan, for example, would improve air quality in India.

LABOR UNIONS and environmentalists in rich countries have most actively sought labor and
environmental standards. The danger is that enforcing such standards may simply become an
excuse for rich-country protectionism, which would harm workers in poor countries. Indeed,
people in poor countries, whether capitalists or laborers, have been extremely hostile to the
imposition of such standards. For example, the 1999 WTO meeting in Seattle collapsed in part
because developing countries objected to the Clinton administrations attempt to include labor
standards in multilateral agreements.

A safe prediction is that international trade agreements will continue to generate controversy.

Foreign Trade Policy and Regulation

International Market Place & Space, Barriers

International Politics & Economic Integration

Economic integration is the unification of economic policies between different states

through the partial or full abolition of tariff and non-tariff restrictions on trade taking place
among them prior to their integration. This is meant in turn to lead to lower prices for
distributors and consumers with the goal of increasing the level of welfare, while leading to
an increase of economic productivity of the states. The trade stimulation effects intended by
means of economic integration are part of the contemporary economic Theory of the Second
Best: where, in theory, the best option is free trade, with free competition and no trade
barriers whatsoever. Free trade is treated as an idealistic option, and although realized within
certain developed states, economic integration has been thought of as the "second best"
option for global trade where barriers to full free trade exist.

Economic integration, process in which two or more states in a broadly defined geographic
area reduce a range of trade barriers to advance or protect a set of economic goals.The level
of integration involved in an economic regionalist project can vary enormously from loose
association to a sophisticated, deeply integrated, transnationalized economic space. It is in its
political dimension that economic integration differs from the broader idea of regionalism in
general. Although economic decisions go directly to the intrinsically political question of
resource allocation, an economic region can be deployed as a technocratic tool by the
participating government to advance a clearly defined and limited economic agenda without
requiring more than minimal political alignment or erosion of formal state sovereignty. The
unifying factor in the different forms of economic regionalism is thus the desire by the
participating states to use a wider, transnationalized sense of space to advance national
economic interests.
Forms of economic integration

Although there are many different forms of economic integration, perhaps the most
convenient way to order the concept is to think of a continuum that ranges from loose
association at one end to an almost complete merging of national economies at the other end.
Although it is far from a given that positive experiences in the simpler forms of economic
integration will lead to a deepening of the process to increasingly integrated shared economic
spaces, the more-complex forms incorporate and are founded on the substantive elements of
 the earlier forms. The significant point is that although economic integration is explicitly
framed by trading relationships, it acquires an increasingly political character as it reaches
deeper forms.

Simple free-trade area

The most basic type of economic integration is a simple free-trade area. In this form,
attention is focused almost exclusively on a reduction of the tariffs and quotas that restrict
trade. Emphasis is placed almost entirely on increasing the exchange of goods. The
articulation of transnationalized production chains, trade in services, labour mobility, and
more-sophisticated forms of economic integration are not an explicit goal and emerge as
merely tangential to the primary goal of securing access to foreign markets for domestic
firms.

Second-generation free-trade area

In a second-generation free-trade area, the basic nature of simple free trade is expanded to
include trade in non-goods such as services. Where a simple free-trade area need only
address the question of tariffs and quotas, the trade in services and a widening of trade in
goods raises questions of regulatory convergence and the harmonization of rules of operation
and governance. At this stage, attention needs to be turned to such things as the
transferability of professional certifications as well as questions of labour mobility,
particularly for the highly skilled professions such as legal, accounting, technology, and
medical services. The increased interdependence between the participating economies that
comes with expanded trade in all economic areas and a measure of regulatory convergence
can lead to an increased distribution of production chains across national boundaries.

Customs union

As national production structures transnationalize across the regional space, the next stage is
to deepen regulatory harmonization to present a common stance to the extra-regional market.
The result is the formation of a customs union relying upon a common external tariff. One of
the key attractions of this regulatory convergence between participating economies is that it
reduces the challenges of monitoring and taxing external inputs that are used to produce
goods and services that circulate within the region. Implicit in the adoption of a common
external tariff is a further harmonization of national rules and regulations, particularly those
relating to the control and flow of external trade into the regional economic space.

Common market

The idea of a common market grows from the possibilities presented by the adoption of a
common external tariff. As trade flows increase and factor inputs imported into the
integrating economies begin to circulate freely, production chains crossing the intra-regional
national boundaries begin to form. This results in sustained pressure to reduce the costs of
transporting finished and semi-finished goods between the states participating in the
integration project. The solution is the harmonization of border procedures, which in its
 ultimate form leads to the virtual elimination of national boundaries as internal barriers to
trade and the formation of a free-flowing regional economic space. A concomitant change
with this complete opening of internal trade is a liberalization of labour mobility, allowing
the inhabitants of one member state to work in all the other member states of the region.

Monetary union

With the evolution of a common market and the concomitant surge in intra-regional trade
comes a new source of expenses for business: the costs of transnational transactions. Even
though borders may be open to the free transit of goods and services, the need to constantly
engage in foreign exchange operations to settle payments as well as the differing relative
costs caused by different national economic policies impose a constant financial and
administrative expense on firms operating within the region. The solution and next stage in
the integration progression is some form of monetary union, be it through an agreed fixing of
relative exchange rates or the more commonly discussed adoption of a common currency. At
this point, the economic aspects of integration also begin to take on a strong political flavour.
Adoption of a common currency or monetary policy by all members of the project also
requires a strong convergence in macroeconomic policy, which imposes external restraints on
the domestic fiscal and expenditure policies that a government may pursue. The result is a
gradual blurring of the political as well as economic lines that separate the states participating
in the integration project.

Economic community or union

In an economic community or union, the logic of common external tariffs, regulatory

approximation, and harmonization of macroeconomic policy is taken to its full conclusion
through the construction of an overarching governance framework that imposes a common
economic policy system on all countries in the region. In effect, the member states surrender
a significant degree of economic sovereignty to the whole in the expectation of significantly
expanded opportunities presented by a much larger, fully integrated economic space
facilitating the full mobility of finished products, factors of production, and labour. The
harmonization of regulations and procedures is facilitated through the creation of an
overarching legislative and legal system that trumps national laws and rules and also ensures
that economic actors will face the same treatment throughout the region.

Justifications of economic integration

The extent to which a region will deepen its economic integration and adopt the
characteristics of a supranational state is partially influenced by the factors prompting states
to start the regionalization process. Four broad reasons for pursuing economic integration can
be identified.

Reactive regionalism

Reactive regionalism is also referred to as defensive regionalism, suggesting that states

choose to pursue economic integration to protect their shared interests from a specific or
 nebulous external threat. In a historical context, reactive regionalism was viewed by
developing countries as a technique for providing the large internal markets needed to
support nascent industrial sectors. Although the decline of import-substitution
industrialization strategies and the rise of neoliberalism have greatly reduced the protectionist
aspect of reactive regionalism, the idea of providing a common level of shelter for internal
producers does remain in integration projects such as the South American trade bloc
Mercosur.

The more common motive for contemporary economic integration projects lies in the logic of
defensive regionalism. Here the participating states are reacting to perceived threats in the
international economic environment. In some instances, such as Canadian participation in the
North American Free Trade Agreement (NAFTA), the regional economic integration route
was pursued to prevent a country from becoming isolated in a global economic system that
appeared to be increasingly drifting toward a series of large economic blocs. Other regional
groupings, such as the Andean Community and Mercosur, emerged partly as an attempt to
use the expanded internal market as a lure to attract foreign direct investment (FDI) in an
increasingly competitive international investment climate. Either way, the common element
is that the participating states are seeking to use their combined economic mass and density
to protect shared interests and to mitigate external vulnerabilities.

Peace and security

The most prevalent example of an economic integration emerging as part of an effort to

ensure peace and security is the European Union (EU). As the neofunctionalist school
suggests, the idea is to increase economic interpenetration between erstwhile hostile
countries, seeking to raise the level of interdependence to the point where armed conflict and
sustained mutual isolation become economically unsupportable. This underlying rationale
can either emerge as a consensus position between participating states, as was partly the case
in Argentine-Brazilian approximation in the 1980s and the formation of the South Asian
Association for Regional Cooperation (SAARC), or be suggested as a solution to simmering
hostilities by mediating actors as an effective method for diffusing potential conflicts, as has
sometimes been the case with the South American infrastructure integration program
launched in 2000.

Efficiency

The defensive character of many integration projects is in some cases eclipsed by a desire to
reduce transaction costs within a regional space that is seeing growth in transnational
production structures. Here the example of the Association of Southeast Asian Nations
(ASEAN) is instructive, with a sustained rise in the regional distribution of production
structures creating pressure for increased logistical and regulatory cooperation to facilitate
the exchange of production factors. Significantly, an efficiency-seeking rationale to
economic integration will not necessarily bring about pressure for labour mobility and often
completely rejects the sorts of political approximations implicit in the deeper forms of
 economic integration. The profit-making potential of economic cooperation within the region
remains the dominant factor, with only tangential attention being given to notions of social or
political integration.

Externalization

Although rarely explicitly framed as the need to externalize the rationale for politically
contentious policies, economic integration has emerged as a device used on the domestic
political stage. In South America the pursuit of an economic integration project was one
justification used by pro-democracy factions in Argentina and Brazil in the late 1980s to
neutralize lingering calls for a return to authoritarianism. Democratic governments in
developing countries have also used the need to adhere to regional commitments as the
justification for the pursuit and implementation of the Washington Consensus model of
neoliberalism. Particularly important in this respect has been the reduction of state supports
for local industries, the lowering of high tariff walls, and the privatization of state-owned
firms. The pattern is thus one of domestic governments placing the blame for some of the
politically difficult neoliberal economic programs pursued in the 1990s on the need to meet
the countrys regional commitments, with the integration project being presented as the
source of long-term and sustainable economic advantages as well as a collectively improved
insertion into the international economy.

The political factor

Although economic integration leads to regionalism as a method of organizing interstate

relations that focuses on economic questions, it is in the end a politically motivated concept.
States do not fall into economic regionalism by accident. Rather, they engage in long,
sustained, and highly technical discussions to carefully delimit the policy and geographical
boundaries of the region. Management of the region, irrespective of the extent to which it has
resulted in economic integration, also emerges as a potential source of sustained political
tension between member states. Different levels of relative economic strength, sophistication,
and global competitiveness provide a basis for divergent views over how the integration
project should operate and how it should evolve over time. Particularly contentious can be
the role of the anchor state, the state with the large market that is often present in an
economic integration project and effectively provides the membership rents to the other
members by absorbing an increased proportion of their exports. The point is that, even
though an economic region is founded on and discussed in terms of the technocratic language
of economics, the power relations and equations typically found in international relations
remain, although manifest in different and sometimes indirect form.

The formation and pursuit of economic integration can also present new international
challenges for participating states. Developing states engaged in a defensive regionalist
project to improve their collective negotiating power with predominant states in the global
political economy can be faced with a divide-and-conquer strategy in interregional and
multinational negotiations. This places additional strains on the anchor state to maintain the
solidity of the region. In some instances this is not a particularly significant challenge,
because the benefits of collective negotiation in international forums quickly outweigh the
 economic benefits offered by the group. In some respects, this reflects the EUs quiet strategy
of encouraging economic integration and regionalism as a strategy for internally driven
development and enhanced political stability in developing areas.

REGIONAL TRADE BLOCS

Regional trade blocs are intergovernmental associations that manage and promote
trade activities for specific regions of the world.

Meaning

Group of countries

Existence within a geographical region.

Motive is to protect themselves from the imports of non-members

A form of economic integration increasingly shaping the pattern of world trade.

Advantages and Disadvantages of trade blocs

Advantages 7798755062-

There are five major advantages of trade bloc agreements: foreign direct investment,
economies of scale, competition, trade effects, and market efficiency.
Foreign Direct Investment: An increase in foreign direct investment results from trade
blocs and benefits the economies of participating nations. Larger markets are created,
resulting in lower costs to manufacture products locally.
Economies of Scale: The larger markets created via trading blocs permit economies of scale.
The average cost of production is decreased because mass production is allowed.

Competition: Trade blocs bring manufacturers in numerous countries closer together, resulting
in greater competition. Accordingly, the increased competition promotes greater efficiency
within firms.

Trade Effects Trade blocs eliminate tariffs, thus driving the cost of imports down. As a result,
demand changes and consumers make purchases based on the lowest prices, allowing firms with
a competitive advantage in production to thrive.

Market Efficiency: The increased consumption experienced with changes in demand combines
with a greater amount of products being manufactured to result in an efficient market.
Disadvantages

The disadvantages, on the other hand, include: regionalism vs. multinationalism, loss of
sovereignty, concessions, and interdependence.

Regionalism vs. Multinationalism: Trading blocs bear an inherent bias in favor of their
participating countries. For example, NAFTA, a free trade agreement between the United States,
Canada and Mexico, has contributed to an increased flow of trade among these three countries.
Trade among NAFTA partners has risen to more than 80 percent of Mexican and Canadian trade
and more than a third of U.S. trade, according to a 2009 report by the Council on Foreign
Relations. However, regional economies by establishing tariffs and quotas that protect intra-
regional trade from outside forces, according to the University of California Atlas of Global
Inequality. Rather than pursuing a global trading regime within the World Trade Organization,
which includes the majority of the world's countries, regional trade bloc countries contribute to
regionalism rather than global integration.

Loss of Sovereignty: A trading bloc, particularly when it is coupled with a political union, is
likely to lead to at least partial loss of sovereignty for its participants. For example, the European
Union, started as a trading bloc in 1957 by the Treaty of Rome, has transformed itself into a far-
reaching political organization that deals not only with trade matters, but also with human rights,
consumer protection, greenhouse gas emissions and other issues only marginally related to trade.

Concessions: No country wants to let foreign firms gain domestic market share at the expense of
local companies without getting something in return. Any country that wants to join a trading
bloc must be prepared to make concessions. For example, in trading blocs that involve developed
and developing countries, such as bilateral agreements between the U.S. or the EU and relatively
poor Asian, Latin American or African countries, the latter may have to allow multinational
corporations to enter their home markets, making some local firms uncompetitive.

Interdependence: Because trading blocs increase trade among participating countries, the
countries become increasingly dependent on each other. A disruption of trade within a trading
bloc as a result of a natural disaster, conflict or revolution may have severe consequences for the
economies of all participating countries.

Major Trade Blocs

1. EU (European Union )

2. NAFTA (North American Free Trade Agreement)

3. MERCOSUR (Mercado Comun del Cono Sur, also known as Southern Common
Markets (SCCM)

4. ASEAN (Association of Southeast Asian Nations)

5. SAARC (south Asian association for regional cooperation)

European Union (EU)

The worlds largest trading bloc.

The 2nd largest economy in the world.
Originally called the Economic Community.(Common Market or The Six)
It comprised of 6 members- Germany, France, Italy, Belgium, Netherlands and
Luxemburg.
At present it comprises of 27 member states.
Objectives of European Union

Setting up a common market for all goods & services by eliminating all trade
barriers.

Promoting free trade among the members.

Continuous and balanced expansion.

Closer relations between the member states.

B. North American Free Trade Agreement (NAFTA)

Initially bilateral trade between Canada & U.S.

NAFTA went into effect in January 1,1994 after the joining of Mexico, creating a
trilateral trade bloc in North America.

Worlds largest free trade area.

NAFTA has two supplements: the North American Agreement on Environmental

Cooperation (NAAEC) and the

North American Agreement on Labour Cooperation (NAALC).

Provisions of NAFTA

Eliminate barriers to trade & investment between US, Canada & Mexico.
Duty-free market access.
Trade rules- safeguard, subsidies countervailing & antidumping duties, health &
safety standards.
Rules on trade in services & investment.
Protection of intellectual property.
Dispute settlement mechanism.
Organisation of Petroleum Exporting Countries (OPEC)

A permanent, intergovernmental Organization, created at the Baghdad Conference

on September 1014, 1960 ( Iraq, Kuwait, Iran, Saudi Arabia and Venezuela ).
The main objective is to coordinate and unify petroleum policies among the
member countries.
To secure fair and stable price for petroleum producers.
Proper price and regular supply for petroleum consuming nations.
Its Headquarter is in Vienna, Austria.

Association of Southeast Asian Nations (ASEAN)

Formed 8th August,1967 (Indonesia, Malaysia, Philippians, Singapore & Thailand)

Later joined by Brunei, Burma, Cambodia, Laos & Vietnam

Established ASEAN Free Trade Area (AFTA)

Headquarter- Jakarta, Indonesia.

Aims of AFTA:-

Primary goals of AFTA are:-

To encourage inflow of foreign investment into this region.

To establish free trade area in the member countries.
To reduce tariff of the products produced in ASEAN countries.
Objectives of ASEAN

Accelerating Economic Growth.

Social Progress.
Cultural Development among its members.
Protection of regional peace and stability.
Discuss issues peacefully.
South Asian Association for Regional Cooperation (SAARC)

Established on 8th December 1985

Member Countries- Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan & Sri
Lanka

Headquarter- Kathmandu, Nepal

Objectives of SAARC

to promote the welfare of the people of South Asia and to improve their quality of
life

to accelerate economic growth, social progress and cultural development in the

region

to promote and strengthen selective self-reliance among the countries of South

Asia

to contribute to mutual trust, understanding and appreciation of one another's

problems

to strengthen cooperation with other developing countries

to maintain peace in the region

SAPTA

The council of ministers have signed the SAARC preferential trading arrangement
agreement on April 11, 1993.

Objectives:-

To gradually liberalize the trade among members of SAARC

To eliminate trade barriers among SAARC countries & reduce or eliminate tariffs

To promote and sustain mutual trade & economic cooperation among member
countries

MERCOSUR; Mercado Comun del Cono Sur

Established in 1991 by Brazil, Argentina, Paraguay, Uruguay.

These four members generate 70% GNP of South America.

By 1996, MERCOSUR had abolished tariffs on goods accounting for 90% of the
trade between its members countries, with remaining tariffs to be abolished by
2000.

MERCOSUR & EU Signed a cooperation agreement to pave the way for a free trade
accord in 2001.