Impacts of Regional Trade Blocs on Globalization - Essay Example

? Impacts of regional trade blocs on globalization Globalization has brought many revolutionary changes in the global political and economiccircles. The trade activities between countries have under gone drastic changes as a result of globalization. Globalization provides greater opportunities to regions and countries to conduct the trade and economic activities more effectively. The bargaining power of trade blocs (group of countries on a particular region) is more than the bargaining power of an individual country which forced different countries to form different regional trade blocs to increase their competitive power and bargaining power. North American Free Trade Agreement (NAFTA), South Asian Free Trade Area (SAFTA), Association of South East Asian Nations (ASEAN) etc are some of the regional trade blocs formed to exploit the opportunities of globalization. This paper focuses more on the North American Free Trade Agreement (NAFTA) and South Asian Free Trade Area (SAFTA) to analyze the impacts of these trade blocs on globalization. Impacts of globalization on political and economic systems The history and formation of the trade bloc Since the mid-1980s there has been a profound change in the structure of the international economy due to the widespread growth and internal enhancement of regional trading blocs in all parts of the globe. The World Trade Organization (WTO), for example, notes that almost all of its 134 members are signatories to regional trade agreements with other countries. As of February 1999 the GATT/WTO has been notified of 184 regional trade agreements of which 109 are currently in effect. These regional trade groups, according to Fred Bergsten of the Institute for International Economics, account for approximately 60 percent of world trade. The United States, Mexico, and Canada created a free-trade area (NAFTA) that became effective in January 1994 (Reardon et al, 2002) NAFTA has proposals to expand the size of this trade bloc to the entire American continent. Same way, Agreement on South Asian Free Trade Area (SAFTA) was formed on January 6, 2004 at Islamabad, Pakistan during the 12th SAARC summit. The members of this trade bloc are Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The role that the countries involved in the trade bloc play in the global economy “Regional trade blocs have the effect of lessening trade restrictions between members, while increasing or standardizing trade restrictions for non-members. In terms of worldwide trade, the net effect is arguable” (Reardon et al, 2002). One of the major barriers in increasing trade activities between different countries before the entry of globalization was the governmental trade restrictions imposed by countries. Globalization has brought the concept of free trade between countries and many of the countries which implemented globalization started liberalize the governmental restrictions on trade activities between countries. American economy has the ability to affect the entire global economy. Any fluctuations taking place in American economy is watched with lot of concerns by other countries because of the increasing interdependence of global economy and the trade activities many of the global countries have with America. However, most of these liberalizations of trade rules between countries were taken place between countries which have warm relationships. Countries in the same region with political and economic problems between them have failed to liberalize trade rules. Such problems created more problems to other countries also in doing free trade activities. For example, India and Pakistan are enemy countries and their enmity created problems in signing an agreement between Iran and India in establishing a gas pipe line from Iran to India through Pakistan. However, the formation of SAFTA helped these enemy countries to assemble under one umbrella and currently the problems in establishing the gas line is going to be solved amicably. In short, countries started to realize that the formation of regional trade blocs may help them immensely in increasing the trade activities. According to the article 20 or dispute settlement mechanism of SAFTA, “any dispute that may arise among the Contracting States regarding the interpretation and application of the provisions of this Agreement or any instrument adopted within its framework concerning the rights and obligations of the Contracting States will be amicably settled among the parties concerned through a process initiated by a request for bilateral consultations” (AGREEMENT ON SOUTH ASIAN FREE TRADE AREA (SAFTA), n. d, p.9) The business concepts or philosophies of the organizations have changed a lot as a result if the formations of regional trade bloc. Earlier many of the companies have given more attention to their short term goals at the expense of long term goals. However the formation of regional trade blocs changed such business concepts drastically. Currently “companies may decide to enter a less than favorable nation merely because it has the opportunity for later admission to a favorable trade bloc, allowing that firm entry to a market otherwise too difficult to penetrate (Reardon et al, 2002) The impact of belonging to the bloc on each country’s government Being a member of a trading bloc, which is led by America is definitely beneficial to the member countries of NAFTA. America is the most influential nation in the world at present after the destruction of Soviet Union and they became the single superpower in the world at present. So, the membership of NAFTA will definitely give the member countries many advantages, politically and economically. Apart from increasing the competitive and bargaining power, the membership in trade blocs can also help member countries to; establish some form of regional control regarding trade that fulfills the interests of nations within that region; establish tariffs that protect intra-regional trade from “outside” forces; promote regional security and political concerns or to develop trade in such as way as to enhance the security in the region; promote South-to-South trade, e.g., between Africa and Asia, and between Latin American countries and promote economic and technical cooperation among developing countries (The role and function of regional trade blocs, 2006) In short, the membership in trade blocs will bring political gains also to a member country along with economic gains. It should be noted that America’s will never stay away when any of the member countries of NAFTA faces political or economic problems. Thus the membership in NAFTA or SAFTA will give the feeling of greater safety and security to the individual countries. The power of a group is always better than the power of an individual. Issues and Alternatives with respect to the functioning of trade blocs The member countries in regional trade blocs should do everything possible to enhance the free trade between the member countries. This should be done with the help of avoiding tariffs on importing and exporting goods. However, in some cases, these norms may adversely affect the interests of a particular member country. For example, India is the member country of SAFTA. If India put no restriction upon the import of edible oil from the member countries, the domestic production and selling of coconut oil will be affected. Under such circumstances, Indian government has the option to limit the import of edible oil by increasing the tariffs on the imported edible oil. However, this should be done only after consultation with the SAFTA. Mexico and America also faced some similar problems after the formation of NAFTA. An expected import surge of U.S. corn syrup will likely displace Mexican sugar from the Mexican sweetener market. Mexican sugar growers also face the prospect of increased U.S sugar imports, because the current U.S. cost of production for sugar is less than in Mexico. Moreover, increased imports from other countries have created a substantial U.S. surplus of sugar that could be dumped into Mexico. In the U.S., sugar displaced from the Mexican market by corn syrup could be exported to the U.S. This could overwhelm the delicately balanced U.S. inventory management system, already under siege by increased imports from World Trade Organization (WTO) and Central American Free Trade Agreement (CAFTA) obligations (Olson, n. d, p.1) The above problems were settled amicably after discussions and subsequent agreements signed between these two countries. Lots of alternative options were discussed in order to safeguard the interests of both America and Mexico. These dialogues resulted in the formation of joint Mexican- American commission to resolve current and future disputes. Issues between trade blocs and WTO Since all the trade blocs may try to safeguard the interests of their region, conflicts can arise among different trade blocs. For example, OPEC controls the oil prices in the world. They can increase or decrease the production of oil in order to exploit the market conditions. However, their activities may create problems to other regional trade blocs such as NAFTA and SAFTA since none of these trade blocs are self-sufficient as far as oil resources are concerned. Trade blocs always try to safeguard the interests of the region it represents whereas WTO always likes to safeguard the interests of the entire regions or countries in the world. Because of the above differences in views and objectives, the conflicts between regional trade blocs and WTO are quite possible. WTO exercise less power when it deals with NAFTA and European Union (EU). This is because of the enormous influence America and European counties have one WTO compared to other countries. In fact many countries feel that WTO is a toy in the hands of America and other capitalist countries. WTO always talks about reduction of tariffs to strengthen the free trade. However, reduction of tariffs resulted in depressed agricultural prices in many countries. EU recently had some severe conflicts with WTO and United States. EU put high tariffs on imports from outside the EU to protect domestic farmers. EU guaranteed to by any surplus at the minimum target price. This surplus was then dumped onto world markets, causing further problems for world farmers. This led to lower incomes for world farmers, the USA retaliated by flouting GATT rules and imposing restrictions on EU exports to the US· Eventually the EU agreed to make changes to the CAP cutting Import duties and subsidized export volumes (World Trade Organization, n. d) Consumers and trade blocs “A trade bloc that succeeds in reaping competition and scale effects will lower the prices of manufactures produced within the region” (Conclusion: Tell Me the Truth about Trade Blocs, n. d, p.126). Trade blocs can affect the consumers both positively and negatively. The import of agricultural goods without tariff may create problems to the domestic farmers. They may not get enough prices to their crops when imported products of cheaper prices are available in the market. For example, suppose a country import bananas from other countries without enforcing any tariffs as part of their commitments to keep the interests of the trade blocs intact. The normal consumers in the domestic market may get bananas at cheaper rate whereas the banana producers in the country may not get adequate prices to the banana they produced domestically. Thus, consumers of a country may have both positive and negative results as part of the development of regional trade blocs like NAFTA and SAFTA. References 1. AGREEMENT ON SOUTH ASIAN FREE TRADE AREA (SAFTA), (n.d). Retrieved from http://www.saarc-sec.org/userfiles/saftaagreement.pdf 2. Conclusion: Tell Me the Truth about Trade Blocs, (n. d). Retrieved from http://www.unige.ch/ses/ecopo/demelo/Cdrom/RIA/Readings/Trade_Blocs_Chap06.pdf 3. Dr. Reardon J., Dr. Kling N.D., Dr. McCorkle D.E. and Dr. Miller C. (2002). The Formation of Regional Trade Blocs: A Theoretical Perspective Using Game Theory. American Business Review January, 2002.Vol. 20, No. 1; Pg. 91-99; ISSN: 07432348 Retrieved from http://www.tradeobservatory.org/library.cfm?refID=25367 4. Olson D. (2008). Farmer Agreement Offers Alternative to NAFTA’s Failures Retrieved from http://www.iatp.org/iatp/commentaries.cfm?refid=101487 5. The role and function of regional trade blocs, (2006). Retrieved from http://ucatlas.ucsc.edu/trade/subtheme_trade_blocs.php 6. World Trade Organization, (n. d). Retrieved from http://www.economicshelp.org/trade/wto.html Read More