How international trade flows shapes trading blocs

Since the growth of outsourcing and globalisation during the latter part of the 20th century, developed countries with established industrial bases have been exploiting the low labour rates and skill of labour in less developed countries.

China was the first beneficiary of this expansion. This increased their exports into the developed western nations considerably. Additionally, China expanded its own national investment in industrial and logistics infrastructure to further attract foreign manufacturing investment.

Other nations followed this model to attract rich world foreign direct investment, which led to fast growth in China and other developing countries. This phenomenon identified a number of countries with fast development and other qualities which rich world brands felt safe investing.

Formation of trade blocs

The first wave of nations became known as the BRIC countries (Brazil, Russia, India and China).

This was followed by the VISTA countries (Vietnam, Indonesia, South Africa, Turkey and Argentina).

It is interesting to note that these countries are geographically diverse, but there seems to be much growth in exports from Southeast Asia.

Since these terms were first used, growth has stalled in half of the VISTA and BRIC countries, mainly through recession and politics. What economists and businesses are hoping is that, in the future, outsourcing will stop as wage rates rise in developing countries and there is no advantage in moving to the cheapest nation. Production will then be based on more sound comparative advantages, other than labour rates.

One of the key comparative advantages that can be adopted by any nation and has been clearly encouraged by the UN and WTO is removing barriers to trade.

Since the second world war, this has been achieved by countries clubbing together and agreeing on advantageous trade terms to encourage trade amongst themselves. The most successful of these trade groups is the European Community (EC), which has a reasonably balanced flow of exported and imported goods.

Other nations have agreed that many of the trade aspects of the EC are worth emulating. The USA, Canada and Mexico established the North American Free Trade Agreement (NAFTA), which has encouraged many US manufacturers to relocate to Mexico and has increased the standard of living of many Mexicans. This agreement is being replaced by the nearly identical United States, Mexico, Canada Agreement (USMCA).

In Southeast Asia, there is the Association of South East Asian Nations (ASEAN), which encourages free trade and no tariffs.

South America has the Central American Integration System and Union of South American Nations, again promoting free trade and negotiating with other trade blocks.

The Caribbean Community, Arab League and the African Union are all busy trying to establish trade blocks of similar rules and zero or minimal tariffs.

The big and successful trade blocs are the EU and NAFTA/USMCA. The EU has been refining trade terms and many other trading standards since the 1950s and is based on the free movement of goods, services, capital and labour. It achieves this by ensuring each member state adheres to various directives and standards so that everyone is working from the same baseline.

This also allows the EU to act as a single negotiating body when trying to establish trade deals with other trade blocks or countries. It is these trade deals that have helped the EU keep its trade reasonably balanced with the rest of the world.

Attempts have been made to expand NAFTA, but politics has caused their failure. Smaller nations can benefit greatly from being part of a trade block that contains one or two large economies. This is what drives the EU and ASEAN.

Trade bloc criticisms

The criticism of trade blocs is the difficulty smaller, less developed nations have in joining them. Often membership requires political stability and a respect for the rule of laws and finance, which some of them are still trying to develop. Some argue that larger nations and trade areas attempt to block agreements that do not suit them. The current WTO trade talks, known as the Doha round, have stalled because of this, due to an argument about agricultural subsidies that developing and small nations say they need to compete internationally.

Future global growth of trade will be dependent on trade areas becoming more sophisticated like the EU, and the larger trade blocs being more open with smaller nations who wish to participate and gain the advantages that trade agreements bring to national growth and prosperity. The main barrier to this tends to be political upheaval and uncertainty.

Finally, the success of trade blocs and the uncertainty of the economic and political environment has led to a trend of less globalisation and more international trade between trade blocs which are closer geographically (Manners- Bell 2017). This appears to be a reaction to mitigating risk from many fronts including natural disasters disrupting memory chip production in Taiwan and trade wars caused by tariff implementation in an attempt to force nations to be fairer.

Your task

Can you think of any further advantages/disadvantages of trade blocs?

References

_{Manners-Bell J. (2017) Introduction to Global Logistics. 2nd edn. London: Kogan Page}