A trade bloc is a kind of intergovernmental agreement in which the member states decrease or do away with trade barriers (tariffs and other restrictions), usually as a part of a regional intergovernmental organization.
Trade blocs can be components of a regional organization like the European Union or stand-alone accords between multiple states like the USMCA. Trade blocs can be categorized as preferential trading areas, free-trade zones, customs unions, common markets, or economic and monetary unions based on the degree of economic integration.
Historical trading blocs include the German Customs Union, which was established in 1871 on the foundation of the German Confederation and later the German Empire, and the Hanseatic League, an economic alliance in Northern Europe between the 12th and the 17th centuries. There were waves of trade bloc development in the 1960s and 1970s, as well as following the fall of Communism in the 1990s.
By 1997, regional trade blocs accounted for over half of global trade. Successful trade blocs typically have four characteristics in common, according to economist Jeffrey J. Schott of the Peterson Institute for International Economics: comparable per capita GNP levels, close proximity, comparable or compatible trading regimes, and political dedication to regional organization.
Some proponents of free trade around the world are against trading blocs. They view trade blocs as promoting regional free trade at the price of free trade worldwide. Proponents of global free trade argue that it benefits all nations because it would increase the opportunity for transforming local resources into goods and services that customers both now and in the future want. Economists and academics disagree on whether regional trade blocs promote the expansion of the current multilateral trading system or split the world economy.
9 Major Regional Trading Blocs in The World Economy
Nine of the largest regional trading blocs in the global economy are included in the list below. These blocs are made up of nations that share particular geographic boundaries and have made the decision to work together to ensure regional economic prosperity. The major regional trading blocs in the world are listed below, along with details about their goals, member states, foundations, and importance to the world economy.
- The European Economic Area (EEA)
The European Union (EU) is the world’s largest trading bloc and the second-largest economy in the world. It is also the European Free Trade Association (EFTA)’s largest trading partner, as 70% of imported merchandise in EFTA countries comes from the EU. In order to further strengthen trade and economic relations with its neighboring non-EU countries, the EEA was entered into force on 1 January 1994 through the European Economic Area Agreement.
This agreement creates the Internal Market, which integrates the 27 EU member states and three of the EFTA states–namely Iceland, Liechtenstein, and Norway–into one single market. This bloc is therefore primarily concerned with upholding the four fundamental pillars of the single market which are, the free movement of goods, people, services, and capital. By cooperating and signing the EEA agreement, these three EFTA states are able to be part of the EU’s single market and benefit from free trade with the EU without having to apply for EU membership.
They can also attain equal rights and obligations within the Internal Market without having to adopt certain EU policies–such as common agriculture and fisheries policies; customs union; common trade policy; common foreign and security policy; justice and home affairs; harmonized taxation; and the economic and monetary union. However, they are required to abide by certain horizonal and flanking policies. Together, the EEA has 30 member states.
The 27 EU member states are: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden. Switzerland, an EFTA member state, is not a member of EEA, but has bilateral agreements with the EU.
- The North American Free Trade Agreement (NAFTA)
The NAFTA is the world’s largest free trade area and has a combined population and GNP greater than 15 EU member states. It was initially a bilateral trade agreement between Canada and the United States, but Mexico joined on 1 January 1994; thereby creating a trilateral trade bloc in North America. This agreement aims to eliminate trade and investment barriers among its member countries, promote a free trade environment, increase investment opportunities, and protect intellectual property rights.
This agreement further provides coverage to services, excluding aviation transport, maritime, and basic telecommunication. The NAFTA also has two supplements: the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC); these supplemental agreements aim to handle labor and environmental issues in the member states.
Among the three members, the US is the largest trading country. As of 1 January 2008, all tariffs and quotas were removed on US exports to Mexico and Canada; thereby making Canada and Mexico as the first and third largest merchandise trading partners for the US from 2008 to 2014.
- The Mercado Comun del Cono Sur or Southern Common Market (MERCOSUR)
The MERCOSUR is one of the world’s fastest-growing trading blocs with its four founding members generating 70% of South America’s GNP. It is also one of the world’s leading economic blocs and the fifth-largest economy. It was established on 26 March 1991 with the Treaty of Assunción by Brazil, Argentina, Paraguay, and Uruguay. This bloc aims to accelerate sustained economic development based on social justice, environmental protection, and poverty reduction.
Aside from its four founding countries, Venezuela and Bolivia also joined this tariff union in 2006 and 2015, respectively. However, Venezuela’s membership was suspended in 2016 due to its failure to comply with MERCOSUR’s democratic principles. This bloc also has Chile, Colombia, Ecuador, Guyana, Peru, and Surinam as associate members who can only do preferential trade; they are not allowed to have tariff benefits. As of 2019, MERCOSUR’s top external trading partners are China, the EU, the US, Chile, and Mexico.
- The ASEAN Economic Community (AEC)
The AEC plays a central role in Asian economic integration, as it was the third-largest economy in Asia and the world’s sixth-largest economy in 2019. It was formally established as part of the Association of Southeast Asian Nations (ASEAN) Community on 31 December 2015, in order to further integrate ASEAN economies into a single market and production base. For this aim, this economic community strives to achieve its Blueprint 2025, which envisions making the region highly competitive and fully integrated into the global economy with equitable economic development.
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The AEC’s member states include Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. Singapore is the most outstanding member state due to its strong economy. In regards to trade, 25% of ASEAN trade is intra-regional; thereby constituting the largest share of this bloc’s total trade. Its external key partners in 2019 were China, the US, EU, Japan, and South Korea.
- The Common Market of Eastern and Southern Africa (COMESA)
The COMESA is the largest regional economic organization in Africa. It was formed on 8 December 1994 as a replacement of the former Preferential Trade Area (PTA) which was established in 1981. In this trading bloc, the member states cooperate in developing regional or global trade, as well as their natural and human resources. This economic cooperation among the COMESA member states is aimed to promote peace and security for the people in the region. In light of this objective, the COMESA promotes regional integration; consequently establishing a free trade area and launching a customs union in 2009.
This economic union consists of 21 countries in southern and eastern Africa–namely Burundi, Comoros, Democratic Republic of the Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Somalia, Sudan, Swaziland, Tunisia, Uganda, Zambia, and Zimbabwe. Due to this number of member states and its population of over 540 million people, the COMESA forms a major market for internal and external trade with a global trade in goods worth USD 235 billion. Egypt is the largest trading country in this bloc.
- The Asia Pacific Economic Cooperation (APEC)
As of 2018, the APEC accounts for approximately 60% of the world’s GDP and 48% of world trade. It is one of the most important regional economic forums in the Asia-Pacific Rim, as it has spurred growth, increased its member states’ real GDP, and lifted millions of residents out of poverty in less than three decades. The APEC was established in November 1989 to leverage the growing interdependence of the Asia-Pacific. This forum aims to secure growth and accelerate regional economic integration for the greater prosperity of the region’s population.
It has 21 member states, which are Australia, Brunei Darussalam, Canada, Chile, China, Hong Kong, Indonesia, Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, Taipei, Thailand, the US, and Vietnam. China and the US are the biggest trading countries within this bloc, although its Secretariat is permanently based in Singapore.
- The South Asian Association for Regional Cooperation (SAARC)
As the South Asian region is the most densely populated region and one of the most fertile areas in the world, the SAARC plays an important role in helping South Asian countries work together to reach their potential for prosperity. The SAARC, an organization of South Asian countries, was founded on 8 December 1985 by Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. Afghanistan later joined in 2007.
The member countries cooperate in the areas of human resource development and tourism; agriculture and rural development; environment, natural disasters and biotechnology; economics, trade, and finance; social affairs; information and poverty alleviation; energy, transport, science and technology; and education, security and culture and others. In short, this regional organization is dedicated to developing economically, technologically, socially, and culturally with an emphasis on collective self-reliance.
With this objective, the SAARC has established the South Asia Preferential Trading Agreement (SAPTA) in 1995 and the South Asia Free Trade Agreement (SAFTA) in 2016. The SAPTA aims to promote trade among the member countries, while the latter aims to encourage free trade of goods–excluding all services such as information technology–between the SAARC countries. Among the member states of this bloc, India is the largest trader.
- The Indian Ocean Rim Association (IORA)
Due to its rich natural resources, central location at the crossroads of global oil trade, and fast-growing economies, the Indian Ocean region plays a significant role in the global economy and international trade. The IORA was established on 6 March 1997 as a forum to enhance cooperation within the Indian Ocean region. Currently, its priority areas are: maritime safety and security; trade and investment facilitation; fisheries management; disaster risk management; academic, science and technology cooperation; and tourism and cultural exchange.
IORA also has two focus areas, which are Blue Economy and women’s economic empowerment. Blue Economy refers to the bloc’s initiative to promote sustainable growth and employment opportunities within the region’s maritime economic activities, as the bloc regards marine and coastal environments as a key resource for economic development. With the aim to promote sustainable growth and development within the region, the IORA expanded to comprise 22 member countries and ten dialogue partners.
These member states are Australia, Bangladesh, Comoros, India, Indonesia, Iran, Kenya, Madagascar, Malaysia, Maldives, Mauritius, Mozambique, Oman, Seychelles, Singapore, Somalia, South Africa, Sri Lanka, Tanzania, Thailand, United Arab Emirates, and Yemen. Its dialogue partners, on the other hand, are China, Egypt, France, Germany, Italy, Japan, Republic of Korea, Turkey, the UK, and the US.
- The Latin American Integration Association (ALADI or LAIA)
The ALADI or LAIA is the largest trade and economic integration bloc in Latin America; it consists of 20 million square kilometers and a population of over 570 million people. It was entered into force on 18 March 1981 after the signing of the Montevideo Treaty on 12 August 1980 by Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela. The headquarters is thus located in Montevideo, Uruguay.
ALADI was basically created to replace the Latin American Free Trade Association (LAFTA), which garnered limited success due to its overambition and inflexibility. The LAFTA was formed in 1960 to establish a common market for its member states by 1973. Due to its limited success in attaining its goal, the ALADI was created to continue its policies but with greater allowance for differences between members and without a fixed schedule in regard to the introduction of measures.
This bloc aims to promote the creation of a preferential trading area in the region toward a Latin American Common Market through regional tariff preference granted to products from member countries, regional scope free trade agreements, and partial scope trade agreements.
This agreement between the ALADI member states, therefore, gives preferential treatment to less developed member states in an attempt to make them more competitive in the global economy. Aside from the aforementioned signatories of the Montevideo Treaty, Cuba and Panama also joined this association in 1999 and 2011, respectively. As for ALADI’s trade partners, it has bilateral trade agreements mainly with North America and Asia.
Trading blocs can allow for trade creation, which refers to the increase of trade when trade barriers are removed, and/or new patterns of trade emerge. Trading blocs can result in trade diversion which refers to the shift of importing goods and services from low-cost countries to high-cost countries.
