Trade Blocs

I received an email with a series of questions about trade. I will answer some of them in a series of posts. Here’s the first.

Q. Could you explain what are the benefits of trade blocs? On the other hand, since trade blocs give preferential treatment to its member countries, does this inherently violate the principles of free trading or is this disguised protectionism?

A. Trade blocs and unions provide the same economic efficiency benefits as any movement to freer trade. The main distinction is that blocs are typically bilateral or regional and thus exclude all countries outside the bloc. As such, blocs are discriminatory since they give favorable treatment (i.e., zero tariffs) to some countries but not to others. In principle, blocs violate the MFN rule at the WTO which states that all WTO member countries should receive the very best (or most favorable) trade policy that any country offers. However, Article 24 of the original GATT agreement allowed for an exception in the case of free trade areas since these represented a movement in a trade liberalizing direction.

Nonetheless, because of the discrimination, blocs provide benefits to some industries while excluding or harming others. For example, one advantage of many export industries in Chile, Singapore, Australia, Costa Rica, and in other countries who have signed free trade agreements with the US, is that their products can enter the US market without paying tariffs (at least within a few years), whereas exporters from China, Vietnam, Pakistan and others outside these blocs must continue to pay the tariffs to sell products in the US. This gives firms in US trade partner countries a definite cost advantage and helps them to compete against the Chinese and others. This is an important reason why many countries are eager to join blocs especially with the US and the EU.