UNIVERSITY OF MUMBAI

PROJECT REPORT ON

TRADE BLOCS

SUBMITTED BY

SANTOSH GUNWANT PANDARE

MASTERS OF COMMERCE ( MANAGEMENT )

( M.COM P- II ) ROLL NO 41

UNDER THE GUIDANCE OF:

Prof. K.S.FULMALI

PTVAs
M.L DAHANUKAR COLLEGE OF COMMERCE Vile Parle (East), Mumbai

2013-2014

CERTIFICATE

I, Prof. K.S.FULMALI here by certify that SANTOSH GUNWANT PANDARE of M.L Dahanukar College of Commerce of M.COM P- II MANAGEMENT (Semester- III) has completed project on TRADE BLOCS during academic year 2013-2014. The

informationsubmitted is true and original to the best of my knowledge.

Signature of Project Guide

Signature of the principal

Signature of External Guide

DECLARATION

I, SANTOSH GUNWANT PANDARE of M.L Dahanukar College of Commerce of M.COM (Semester- III ), hereby declare that I have completed project on TRADE BLOCS in the academic year 2013-14, as per the requirement of the University of Mumbai as a part of Master of commerce (M.COM P- II ) programme. The information submitted is true and original to the best of my knowledge.

( SANTOSH GUNWANT PANDARE )

ACKNOWLEDGEMENT

Success is not a destination, but a journey. While I reach towards the end of journey, I realize I may not have come this far without the guidance, help and support of people who acted as guides, friends and torch bearers along the way.

I take this Opportunity to thank the UNIVERSITY OF MUMBAI for giving me a chance to do this project,

I take this opportunity to thank our principal Prof. MADHAVI PETHE for her moral support and guidance. I would like to express my sincere gratitude toward my project guide Prof. K.S.FULMALI whose guidance and care made the project successfully.

Apart from the efforts of me, the success of the project depends largely on the encouragement and guidelines of many others. I take this opportunity to express my gratitude to the people who have been instrumental in the successful completion of this project.

INDEX

Chapter No.
1 2 3 4 5 6 7 8

Topics

P. No

INTRODUCTION OBJECTIVES OF TRADING BLOCS TYPES OF TRADE BLOCS IMPACT OF TRADE BLOCS EMERGENCE OF TRADE BLOCS REGIONAL TRADE BLOCS CONCULSION WEBLOGRAPHY

6 7 8-11 12-14 15-16 17-28 29 30-31

INTRODUCTION

The world today is a global village. Trade is carried out in this village on a very large scale. In this world, no country has been self-sufficient. This has been the very basis of trade occurring between two nations. These countries engage in trade of commodities which are scarce in their respective regions. This brings about fulfilment of resources to each of the nation participating in trade. With the growing amount of global trade between countries, sometimes in the same continent or a different one altogether, there slowly arose a need to form a group of countries with similar interests, so that they could engage in trade more conveniently. Such groups once formulated could ease many barriers placed during a regular trading session. Such groups of countries formulated to ease trade are called Trade Blocs. Trade blocs are agreements between governments of countries where they agree to reduce or abolish tariffs and taxes on inter-country trading. The basic need to form such blocs was to facilitate smooth trade within the region where the bloc has been formed. Such blocs have also been formed to ensure that no country becomes rich in an unjust way due to imbalance in the trade carried out between different nations.

OBJECTIVES OF TRADING BLOCS

To reduce or if possible to eliminate trade barriers among member nations.

To promote free transfer of labour, capital and other factors of production.

To maintain better cultural, social and political ties with each other.

To assist member nations in any possible way with special reference to international trade.

To promote growth of the region through mass production and marketing of goods.

To bargain collectively with non-member by means of their collective strength.

To impose common external tariff and non-tariff barriers on non-members.

TYPES OF TRADE BLOCS

Trade blocs are of different types, and all of them are in prominent existence. These are:

1) Preferential Trade Area (PTA) 2) Free Trade Area (FTA) 3) Customs Union 4) Common Market

The above mentioned types of Trade Blocs have been explained in brief below:

1) Preferential Trade Area (PTA) Such trading bodies exist when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. This is often the first step towards the creation of a trading bloc. Some of the prominent Preferential Trading Areas are: Melanesian Spearhead Group (MSG) The MSG is an intergovernmental organization composed of the four Melanesian states of Fiji, Papua New Guinea, Solomon Islands and Vanuatu. One of the key features of MSG is the Melanesian Spearhead Group Trade Agreement, a sub-regional preferential trade agreement established to foster and accelerate economic development through trade relations and provide a political framework for regular consultations and review on the status of the Agreement, with a view to ensuring that trade both in terms of exports and imports is undertaken in a genuine spirit of Melanesian Solidarity and is done on a most favored nation (MFN) basis.

 South Asian Preferential Trade Agreement (SAPTA) The Agreement on SAARC Preferential Trading Arrangement (SAPTA) was signed with the desire of the Member States of SAARC

(India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan and the Maldives) to promote and sustain mutual trade and economic cooperation within the SAARC region through the exchange of concessions.

2) Free Trade Area (FTA) These are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members. If people are also free to move between the countries in addition to FTA, it would also be an open border. It is considered to be the second stage of economic integration. Countries choose this type of integration when their economical structures are complementary. Some prominent FTAs are: Central European Free Trade Agreement (CEFTA) It is a trade agreement between Non-EU countries in Southeast Europe. The existing members of this agreement are: Albania, Bosnia and Herzegovina, Croatia, Macedonia, Moldova, Montenegro, Serbia and Kosovo. The original CEFTA agreement had been formed by Poland, Czech and Slovak republics. Through CEFTA, these countries hope to mobilize efforts to integrate Western European institutions and to join European political, economic, security and legal systems, thereby consolidating democracy and free-market economies. G-3 Free Trade Agreement (G-3) It is a FTA between Colombia, Mexico and Venezuela. The agreement not only liberalizes trade but includes issues such as investment, services, government purchases, regulations to fight unfair competition and intellectual property rights. Venezuela left the bloc in November 2006.

3) Customs Union It involves the removal of tariff barriers between members, plus the acceptance of a common (unified) external tariff against non-members. It means that members may negotiate as a single bloc with third parties such as with other trading blocs. It is the third stage of economic integration. Some prominent Custom Unions are: Customs Union of Belarus, Kazakhstan and Russia These countries are all set to remove all customs borders between each other after July 2011.They will enter into a single economic space from January 1, 2012. This customs union has been formed with an intention to forming a broader EUtype economic alliance of former Soviet states. EU-Turkey Customs Union Under this union, goods can travel without any customs restrictions. It does not cover essential economic areas such as agriculture, to which bilateral trade concessions apply, services or public-procurement. This customs union is a step towards full Turkish membership of the European Union.

4) Common Market It occurs when member countries trade freely in all economic resources, not just tangible goods. This means that all barriers to trade in goods, services, capital and labour are removed. In addition to removing tariffs, non-tariff barriers are also reduced and

eliminated. A common market is the first step towards a single market. With full freedom of movement for all the factors of production between the member countries, the factors of production become more efficiently allocated, further increasing productivity. Some well known common markets are:

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 European Free Trade Association (EFTA) It is a trade body that runs parallel to and is linked to the EU, for the states who chose not to or were unable to join the EU. The current members of EFTA are Iceland, Norway, Switzerland and Liechtenstein. EFTA has several free trade agreements with non-EU countries as well as declarations on co-operation and joint workgroups to improve trade. The EFTA states have trade relations with 23 states and territories apart from the 27 member nations of the EU. South Asian Free Trade Area (SAFTA) This pact would allow the passage of goods and services between Bangladesh, Bhutan, Maldives, India, Pakistan, Afghanistan, Nepal and Sri Lanka without any barriers. The major provisions of SAFTA call for the gradual reduction of tariffs, custom duties and other trade marries between the seven members.

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IMPACT OF TRADE BLOCS

Trade blocs have been in existence for quite a long time now. Different countries and regions have been involved in these blocs. These blocs have very well served their purpose, in facilitating smooth trade. At the same time there have been some hassles regarding these bodies. While some members have greatly benefited from trade blocs, other countries would surely have a different story to tell. Let us now have a look at the positive and negative impact that the trade blocs have had on various countries.

Advantages of Trade Blocs: Market access and Trade creation: Easier access to each others markets would man that trade between members nations is likely to increase. Trade creation exists when free trade enables high cost domestic producers to be replaced by lower cost and more efficient imports. Low cost imports would lead to lower priced imports; there is a consumption effect, with increased demand resulting from lower prices. Economies of Scale: Producers can benefit from the application of scale economies, thereby leading to lower costs and lower prices for consumers. Lower prices would automatically increase the sales of goods and services in the member nations thereby making the concept of trade blocs very beneficial. Creation of Jobs: There will be large number of jobs created when there is increase trade between members of the trade blocs. Owing to a constant exchange of goods and services, there will be a rise in the need of labour, both skilled and unskilled in order to handle the scale of trade being carried out. This would obviously benefit the people from all the member nations of the bloc.

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 Protection: Firms inside the trading blocs are protected from cheaper imports from outside. The member nations engage in such imports with each other. This gives a wider scope for these firms to carry out their business. There is virtually no risk of competition emerging from outside the members. This helps in developing and strengthening the trade relations between the various members involved. Political Significance: In a trading bloc, there are many nations. When these countries go on to voice their opinions on political and economic issues on a global scale individually, chances are that they would not be taken seriously. But, on the other hand, when these countries go on these stages as a Trading Bloc and then voice their views, they are taken a lot more seriously due to the weight age of the Trade Bloc itself. The trade bloc therefore plays a great role for countries in such cases. Free Trade within the bloc: Members are encouraged to specialise as they have free access to each others markets. There can be a comparative advantage within the region, due to this specialisation. All the traders would go on to do the needful for the same; this would then give traders of some member nations an upper hand, thereby giving rise to comparative advantage.

Disadvantages of Trade Blocs: Inefficiencies and Trade Diversion: Inefficient producers within the bloc may be protected from more efficient ones outside the bloc. This is not only unfair to the efficient producers but also a costly affair for the trade bloc itself. This would lead to unnecessary expenditure being incurred by the bloc, although better prospects are available outside the bloc. Those traders would never get a chance to showcase their goods within the bloc due to the rules existing within the bloc of only In-bloc traders.
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 Harmful for exports: Regional businesses that rely on exporting to other countries to secure their profits might be harmed if their own government has not secured a free trade agreement with the governments of other countries. This instantly raises the tariffs and taxes to be paid on export of goods. This would then compel the importing country to import from other suppliers. Partiality: In a trade bloc, there are only some nations which are members. These countries engage in trade within themselves. There is no scope for any other country to enter into the spectrum. This is very unfair to these countries. These nations do not get an equal opportunity to indulge in trade with the member countries. This hampers the growth of the other countries owing to their exclusion. Loss of benefits: Different trade blocs have different countries as their members. Trade can also go on between these countries apart from just between those in one trade bloc. But, here the benefits that can be derived from trading with other countries are lost out due to being in one trade bloc. Loss of Sovereignty: A trading bloc when coupled up with a political union is likely to lead to at least partial loss of sovereignty for its participants. Such trade blocs are usually associated with issues which are only marginally related to trade such as human rights, consumer protection etc. Interdependence: Such bodies increase trade among participating nations which leads to them increasingly dependent on each other. Any natural disaster or conflict can have severe consequences for the economies of all participating countries, as it will lead to disruption of trade.
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EMERGENCE OF TRADE BLOCS

The original idea of trade blocs was born out of the old concept of Regionalism. It was motivated by a desire to pursue in developing countries import-substitution development at a regional level. This was done to insulate a region from the world economy and to stabilise and foster the economy at a regional level. The great surge of Trade Blocs was seen around the 1960s and 1970s as well as in the 1990s after the fall of communism. By 1997, more than 50% of all world commerce was conducted under the auspices of regional trade blocs. The members of such trade blocs usually share four common traits: a) Similar levels of per capita GNP b) Geographic Proximity c) Similar or compatible trading regimes d) Political commitment to regional organization There have always been arguments whether such trade blocs are leading to a more fragmented world economy or encouraging the extension of the existing global multilateral trading system.

Let us now look at some of the other factors that contributed towards the formation of trade blocs: Easier Process It is easier to facilitate and function in a trade bloc than in a multilateral trade liberalisation agreement. It is always easier to negotiate with a few partners than with a large number of participants in the multilateral process as envisaged under the World Trade Organisation. Concessions can be more easily exchanged among a small number of countries and effective enforcement mechanisms can be agreed upon at a lower cost. Convenient for reforms: Trade blocs often help in ensuring the credibility of the reform process undertaken by one or several members of the trade bloc. Such bodies often involve reform minded countries
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willing to bid their commitments to unilateral liberalisation process by entering into blocs with larger entities. Trade blocs serve as commitment, signalling and insuring mechanisms in the policy determination of its members, hence contributing to reducing uncertainty and increasing credibility about political and economic developments. Geographical Convenience: The gravity model suggests that the countries geographically close trade more than distant countries. The gravity equation predicts that the volume of trade between two countries is negatively related to the economic distance. The term being used taking into account the transport costs and trade barriers between them. As neighbouring countries tend to be natural trading partners they are more likely to form a trade bloc. Non-economic purposes: Trade blocs greatly contribute towards non-economic things like political stability, democratic development and security issues. This also goes on to dispel all chances of security threats between partner countries. It wholly promotes peace and stability within the region involving the trade bloc.

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REGIONAL TRADE BLOCS

In general terms, regional trade blocks are associations of nations at a governmental level to promote trade within the block and defend its members against global competition. Defense against global competition is obtained through established tariffs on goods produced by member states, import quotas, government subsidies, bureaucratic import processes, and technical and other non-tariff barriers. Since trade is not an isolated activity, member states within regional blocks also cooperate in economic, political, security, climatic, and other issues affecting the region.

In terms of their size and trade value, there are four major trade blocks and a larger number of blocks of regional importance. Given below are some prominent trade blocs with a brief explanation of each. A merit and demerit of each bloc has also been given along.

Major Regional Trade Blocs European Union: It was founded in 1951 by six neighboring states as the European Coal and Steel Community (ECSC). Over time evolved into the European Economic Community, then the European Community and, in 1992, was finally transformed into the European Union. Regional block with the largest number of members states (27). These include Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Spain, Portugal, Sweden, The Romania, Netherlands, and Slovakia, the United Slovenia, Kingdom.

The Unions objectives are The promotion of peace and the well-being of the Unions citizens An area of freedom, security and justice without internal frontiers Sustainable development based on balanced economic growth and social justice A social market economy - highly competitive and aiming at full employment and social progress A free single market.
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MERITS OF EU Benefit of citizenship Regarding citizenship, travel and work between member nations is unrestricted, so people facing economic difficulties and unemployment in their home nations may more easily move between nations to find employment. By becoming part of European Union any country has access to the markets of all the other countries.

DEMERITS OF EU Financial difficulties On the down side, EU members that have financial difficulties (Spain, Portugal, Italy, Greece) put a drain on the entire union, and so the tax dollars from a more successful country like Germany must be used to shore up economies outside the country lest one drag down the others

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 North American Free Trade Agreement (NAFTA): The North American Free Trade Agreement or NAFTA is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canada United States Free Trade Agreement between the U.S. and Canada. In terms of combined GDP of its members, as of 2010 the trade bloc is the largest in the world. The objectives of this Agreement, as elaborated more specifically through its principles and rules, including national treatment, most-favoured-nation treatment and transparency are to: Eliminate barriers to trade in, and facilitate the cross border movement of, goods and services between the territories of the Parties; Promote conditions of fair competition in the free trade area; Increase substantially investment opportunities in their territories; Provide adequate and effective protection and enforcement of intellectual property rights in each Party's territory; Create effective procedures for the implementation and application of this Agreement, and for its joint administration and the resolution of disputes; and Establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this Agreement.

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MERITS OF NAFTA Boosted U.S. farm exports NAFTA increased farm exports because it eliminated high Mexican tariffs. Mexico is the top export destination for beef, rice, soybean meal, corn sweeteners, apples and beans. It is the second largest for corn, soybeans and oils. As a result of NAFTA, the percent of U.S. agricultural exports to Canada and Mexico has grown.

DEMERITS OF NAFTA Mexico's Farmers Were Put Out of Business: Thanks to NAFTA, Mexico lost 1.3 million farm jobs. When NAFTA removed tariffs, corn and other grains were exported to Mexico below cost. Rural Mexican farmers could not compete.

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 MERCOSUR (Mercado Comun Del Cono Sul - Southern Cone Common Market): Established on 26 March 1991 with the Treaty of Asuncin. Full members include Argentina, Brazil, Paraguay, Uruguay, and Venezuela. Associate members include Bolivia, Chile, Colombia, Ecuador, and Peru. Associate members have access to preferential trade but not to tariff benefits of full members. Mexico, interested becoming a member of the region, has an observer status. Following are the objectives of the MERCOSUR Free transit of production goods, services and factors between the member states with inter alia, the elimination of customs rights and lifting of nontariff restrictions on the transit of goods or any other measures with similar effects; Fixing of a common external tariff (TEC) and adopting of a common trade policy with regard to nonmember states or groups of states, and the coordination of positions in regional and international commercial and economic meetings; Coordination of macroeconomic and sectoral policies of member states relating to foreign trade, agriculture, industry, taxes, monetary system, exchange and capital, services, customs, transport and communications, and any others they may agree on, in order to ensure free competition between member states; and The commitment by the member states to make the necessary adjustments to their laws in pertinent areas to allow for the strengthening of the integration process.

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MERITS OF MERCOSUR Although not in the current period, MERCOSUR concretely aims to create a continent wide free area. This idea is greatly beneficial to the continent of South America. This will go on to boost the entire continent in all major aspects.

DEMERITS OF MERCOSUR The rules of MERCOSUR are usually one sided, thereby not giving a fair picture or a fair chance to all countries to participate in the process equally. This a hindrance as many times, countries can feel sidelined which would end up in discontent among them.

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 Association of Southeast Asian Nations (ASEAN): The ASEAN-Japan Centre was established on May 25, 1981 based on the Agreement Establishing the ASEAN Promotion Centre on Trade, Investment and Tourism (hereinafter, The Agreement) signed by the government of the Association of the Southeast Asian Nations (ASEAN), then consisting of the Republic of Indonesia, Malaysia, the Republic of the Philippines, the Republic of Singapore and the Kingdom Thailand, and Japan. Later Brunei Darussalam (June 8, 1990), the Socialist Republic of Vietnam (February 12, 1998), the Kingdom of Cambodia (June 11, 2001), Lao Peoples Democratic Republic (March 20, 2002) and finally, the Union of Myanmar (April 27, 2006) officially acceded to the Agreement. Now all the 10 ASEAN countries and Japan are members of the Centre. The ASEAN nations came together with three main objectives in mind: to promote the economic, social and cultural development of the region through cooperative programmes; to safeguard the political and economic stability of the region against big power rivalry; and To serve as a forum for the resolution of intra-regional differences.

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MERITS OF ASEAN Established in 1992 as one of the main pillars of the ASEAN Free Trade Agreement, AFTA set a timeframe for all ASEAN members to eliminate trade tariffs amongst member-states as a means to make the trade bloc more internationally competitive.

DEMERITS OF ASEAN There are possibilities that the ASEAN can diverge its rules and procedures from that of the WTO. This is not at all a favourable situation as this can very well lead to chaos and confusion among the global trading community.

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 South Asian Association for Regional Cooperation (SAARC): The South Asian Association for Regional Cooperation (SAARC) is an organisation of South Asian nations, founded in December 1985 by Zia Ur Rahman and dedicated to economic, technological, social, and cultural development emphasising collective selfreliance. Its seven founding members are Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka. Afghanistan joined the organization in 2005. Meetings of heads of state are usually scheduled annually; meetings of foreign secretaries, twice annually. It is headquartered in Kathmandu, Nepal. The objectives of SAARC are: To improve the quality of life & welfare of the people of the member countries. To develop the region economically, socially & culturally To provide the opportunity to the people of the region to live in dignity & to exploit their potentialities. To enhance the mutual assistance among member countries in the areas of economic, social, cultural, scientific &technical field.

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MERITS OF SAARC: It has laid a strong foundation for a regional co-operation process. This has bought in great sentiments of belief and faith within the region in terms of trade and business.

DEMERITS OF SAARC: There is a serious lack of political will among the member nations to effectively deal with issues relating to ease restrictions on the free movement of people, goods, services and capital.

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 The Economic Community of Central African States (CEMAC): CEMAC is an Economic Community of the African Union for promotion of regional economic co-operation in Central Africa. It "aims to achieve collective autonomy, raise the standard of living of its populations and maintain economic stability through harmonious cooperation. The ultimate goal is to establish a Central African Common Market. At the Malabo Heads of State and Government Conference in 1999, four priority fields for the organization were identified: to develop capacities to maintain peace, security and stability - as essential prerequisites for economic and social development to develop physical, economic and monetary integration to develop a culture of human integration To establish an autonomous financing mechanism for ECCAS.

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 MERITS OF CEMAC: The biggest merit of this trading bloc is that all the countries within this region share a natural comparative advantage. This helps in framing policies with a better point of view. There is no disparity within the region DEMERITS OF CEMAC: The tariff removal within the CMAC region has been stated in theory, but has to be yet implemented in practise. The implementation has been delayed, thereby causing harm to the ongoing business activities within the region.

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CONCLUSION

In this report, we have seen the concept of trade blocs, their types, merits and demerits This report has briefly explained the emergence of trade blocs, through which one can understand the need for such bodies to be formulated in the first place. From all these things, we can say that although many purists think that trade blocs are bad for global trade, they do actually benefit some weaker nations which are a part of some trade blocs. These nations are greatly helped due to the provisions of trade blocs and are thereby propped up. Therefore, trade blocs although not completely pure due to dominance by some regions over others, it does have benefits too. All in all, one can say that Trade Blocs are the beginning of a global village coming closer to form larger countries comprising of nations within groups.

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