A

Presentation
on
Regional Trading Blocs: Are they barriers to
Free Trade?

Presented By:

Sandeep Kumar Baranwal

Shreya Bhattacharya
Sheena Goyal
Nikhil Thorat
Shantanu
Important Regional Trading Blocs of the World
Objectives of the Study

 To investigate appropriancy of Foreign Trade Policy and

Practices of countries of the world

 To observe the constructive and destructive implications of

Regional Trading Blocs vis-à-vis Global Free Trade

 To investigate whether Global Free Trade is more important

than Regional Trading Blocs.
 Methodology

 Descriptive Analytical Framework

 Extensive use of Secondary Data

 Alternative Scenario Analysis

 Limitations of the Study

 Descriptive

 No Country Wise Analysis

 No specific stand
 Presumptions

Regional Trading Blocs are not barriers to Free Trade

 Pursuit of Global Free Trade lead to the development of Rival Trading Blocs
 Regional Trading Blocs are the second best option , given that Global Free Trade is not realizable in real world
 Formation of Regional Trading Blocs are stepping stones to realization of Global Free Trade
 Global Free Trade may ensure efficient utilization of World Resources and Technologies
 Regional Trading Bloc would collude into Global trading bloc
 Types of trade barrier that regional trading blocs would offer, though important but not significant to put a barrier to
Global Free Trade
 Liberalization of conditions that restricts Global Free Trade would not itself ensure the non realization of World Economic
System due to presence of complex market failure. There can only be a drive towards Global Free Trade.

Regional Trading Blocs are barriers to Free Trade

 An existence of Regional Trading Bloc provides an impetus for other countries to form a new Regional Trading Bloc
 Regional Trading Bloc leads directly to Protectionism
 WTO rules can easily be defeated by Regional Trading Blocs

General Assumption

 Realization of Global Trading Bloc amounts to realization of Global Free Trade and hence World Economic System
Regional Trading Bloc are not barriers to Free
Trade

Literature Review

Guiding Principles of Various Regional Trading Blocs

 “Prerequisite for the stimulation of domestic, regional and foreign direct investment and the
expansion, growth and the development of the economies of each member state and the
region as a whole” Kinshasa Resolution on the Establishment of a COMESA: Common Market
for Eastern and Southern Africa (1998).

 “To contribute the harmonious development and expansion of world trade and provide a
catalyst to broader international cooperation” North American Free Trade Agreement (1992).

 “The regional integration did not hamper world trade liberalization, but rather was an
essential component of it, enabling countries at differing levels of development to participate
more effectively in world trade.” The representative of Colombia to the WTO working party
meeting on Mercosur, 10-11, Oct. 1995.
Regional Trading Bloc are not barriers to Free
Trade

Literature Review
Guiding Principles of Various Regional Trading Blocs

 “A stimulus to the development of the national economies by expanding investment and

production opportunities, trade, and foreign exchange earnings” Agreement on the Common
Effective Preferential Tariff Scheme for the ASEAN Free Trade Area (1992).

 “To create an expanded market for the goods and services produced in their territories and to
reduce distortions to trade” Treaty on Free Trade Between the Republic of Colombia, the Republic
of Venezuela and the United Mexican States (1994).

 “Pursuing stronger regional trade agreements can help form the building blocks for global
free trade deals,” Alejandro Foxley (a senior associate in the Carnegie International
Economics Program, and at the Corporación de Estudios para Latinoamérica (CIEPLAN) in
Santiago, Chile) writes. “Increasing trade will not only help middle-income economies
develop but also drive growth around the world as the financial crisis recedes.”
 Models and Theories Regional Trading Bloc is not a barrier to Free Trade

Porter’s Diamond Model of International Trade

 Models and Theories Regional Trading Bloc is not a barrier to Free Trade

Transaction Cost Theory of

International Trade

Market Imperfection Theory of

International Trade

Eclectic Theory
 Models and Theories Regional Trading Bloc is not a barrier to Free Trade

Trade Creation Theory

This involves a shift in domestic consumer spending

from a higher cost domestic source to a lower cost
partner source within the EU, as a result of the
abolition tariffs on intra-union trade. So for example
UK households may switch their spending on car and
home insurance away from a higher-priced UK supplier
towards a French insurance company operating in the
UK market.
Similarly, Western European car manufacturers may
be able to find and then benefit from a cheaper source
of glass or rubber for tyres from other countries within
the customs union than if they were reliant on
domestic supply sources with trade restrictions in
place. Trade creation should stimulate an increase in
intra-EU trade within the customs union and should, in
theory, lead to an improvement in the efficient
allocation of scarce resources and gains in consumer
and producer welfare.
Regional Trading Bloc are not barriers to Free
Trade

Impact of Regional Trading Blocs

on

World Trade FDI Flows

Freight Dynami Infrastructure

cs Debt Position
Investment
 Intra-regional trade per sub-region (exports of goods as a proportion of GDP)
Source: ECLAC, International Trade and Integration Division, based on official data.

  1980 1985 1990 1997 2003   

LAC 16.4 10.6 14.4 21.1 16.0   

CAN 3.7 3.2 4.1 12.1 9.0   

MERCOSUR 11.6 5.5 8.9 24.9 11.9   

CACM 23.1 14.4 14.1 13.3 20.7   

CARICOM 8.3 11.3 12.4 16.7 21.3   

NAFTA 33.6 43.9 41.4 49.1 55.0   

FTAA (34) 33.6 43.9 41.4 49.1 60.1   

ASEAN (10) 17.4 18.6 19.0 24.0 22.7* 

EU(15) 55.6 59.9 64.9 62.9 62.7   

Regional Trading Blocs are barri
ers to Free Trade
Article XXIV of the GATT limits on the rights of Regional Trading Bloc

A Regional Trading Bloc must:

 Not “on the whole” raise protection against excluded countries
 Reduce internal tariffs to zero and remove “other restrictive regulations
of commerce” other than those justified by other GATT articles
 Cover “substantially all trade.

• These conditions ensure that Regional Trading Bloc do not

undermine the access of other countries to its market
Models and Theories Regional Trading Blocs are barriers to Free Trade

Trade Diversion Theory

An imposition of tariff by a Regional Trading

Bloc on Rest of the World lead to inefficient
utilization of resources and imposes costs on
the society in form of dead weight loss.

Dynamism of Regional Trading Blocs

The presence of Regional Trading Bloc create

incentives for excluded countries to join
existing Regional Trading Bloc, to form new
Regional Trading Bloc of their own, or to
change their external trade policy in other
ways
Models and Theories Regional Trading Blocs are barriers to Free Trade

Disincentives to Developing Countries to open up

their economy to Global Free Trade
Inferences

 The World witnesses the growth of tendencies towards Global Free Trade and Regional
Trading Bloc simultaneously which has the implication both in the short run and in the long
run

 Due to the difficulty in arriving at a consensus to embrace Global Free Trade for time being,
many countries in definite regions of the world decided to gain economic strength with the
help of regional co-operation such that in future they could open their economy to realize
the objective of World Economic System with a promise to secure a favorable terms of
trade

 It would be too early to state that Regional Trading Blocs are barriers to Free Trade
Open Regionalism

If
Unstable
World
Economi
c System

Analysis of
circumstances under
which unstable World
Economic System
arises
Bibliography

 http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/
 turkishweekly.net
 ibgeog2009.wikispaces.com
 ibgeography.com
 http://www.international.gc.ca/economist-economiste/analysis-analyse/research-rec
herche/10_pre.aspx
 qwickstep.com
 http://ec.europa.eu/ireland/about_the_eu/eu_in_the_world/trade/index_en.htm
 ec.europa.eu
Thanks 