Trade Blocs Research Paper

Effects of trade blocs on growth and development of Business

1.0 Introduction

According to Michael Czinkota et.al, a trade bloc is a preferential arrangement among a group of countries.

It is an agreement between states, regions, or countries, to reduce barriers to trade between the participating regions.

Trade blocs’ main aim is to encourage free trade and access to foreign markets.

Kerry Chase states that the growth of multinational production in which businesses moves discrete stages of manufacturing to different countries has contributed into the creation of trade blocs.

However, this does not apply to examples such as transfer of manufacturing sections into China that has recently been witnessed around the globe because the current

It will also explain the benefits and setbacks experience in the trade blocs over the decades and how these factors affects the economies of the participating nations.

Alejandro Foxley (2010) explains that middle-income countries have pursued regional trade Agreements since the 1960s because of the global economic crisis that curtails demand from major markets such as the United States and other major markets.

Trade blocs such as the European Union (EU), provides a market to over 80 percent of the goods produced by the member countries.

Kelly Chase explains that to understand the formation of trading blocs and their external effects one requires examining of the domestic systems and national policy-making process. He continues to argue that it is because trading blocs’ formation is driven by domestic political pressures from organized interest groups in the society.

The literature analyzed explains that trade blocs offers additional markets for member states and encourages free trade which helps in growth of the

Nevertheless there are other benefits involved in integration as discussed in this research paper.

3.1 Diversion of trade

According to Michael trade diversion occurs when a Member country acquires the markets of the competitors by joining the trade bloc.

Trade diversion causes purchase from a higher cost producer of a commodity rather than a lower cost produce due to the benefits of tariff elimination.

For instance, trade Spain produces wheat at a higher cost as compared to USA.

When Spain joined the European Union the tariff tax was eliminated hence making their wheat cheaper than USA.

This made the sales volume for the America wheat to drop in the European Market.

In this case it is evident that trade blocs creates a competitive advantage for its member countries over the non-members.

3.2 High Productivity factor

Lolette Kritzinger-van Niekerkstates (1996), that movement of resources across borders causes an increase in investments as companies rush to acquire the larger markets.

This is because by producing a commodity in the target market businesses evade the import tariffs imposed hence reducing on their cost of