Trading Blocs: The Downsides

 Trading Blocs: The Downsides

The governments of member states form trading blocs when they reach an agreement to lower or eliminate trade barriers, such as tariffs and taxes. Although this may appear to be a beneficial notion at first glance, countries who join trading blocs—also called Free Trade Agreements—face substantial drawbacks.



Economists and other academics have long held the view that trade blocs' drawbacks exceed their benefits.



The fact that a trading bloc may hurt economic welfare is maybe the biggest drawback of such an organization.



One drawback of a trading bloc can be illustrated by the following simple example: It becomes more cost-effective for retailers to import goods from other countries when their manufacturing and production costs are significantly lower than those of your local regional manufacturers. This phenomenon occurs when governments form trading blocs with these countries.



Although this appears to be a fantastic plan at first glance, there are a number of drawbacks, such as potential economic hardship for the local producers and manufacturers. There may be a detrimental impact on unemployment rates and on local suppliers as a result of this.



Although the goods might be slightly more costly, the age-old adage "buy local" appears to hold some water in this case.



One further drawback is that governments often exclude other countries that may not have the same advantages for intra-industry trade when they establish free trade agreements amongst themselves.



Businesses in the area that depend on international sales for revenue would be at a disadvantage if their government has not negotiated free trade agreements with other nations. Reason being, exporting their goods can result in increased tariffs and taxes, which in turn drives up prices. This forces the purchasing nation to seek out supplies from other vendors.



A recent example of this type of disadvantage with trading blocs is the arrangement that Europe, Australia, and New Zealand have set up. Australia used to import and export American vehicles at a massive scale, with GM being the most prominent, but now they have deals to import and export to Europe at significantly reduced costs. There is a tariff reduction for Australian grain, sheep, beef, and wool exported to Europe.



Local exporters trying to break into those regions may see a decline in economic vitality and efficiency as a result of this agreement's exclusion of other nations outside the trading bloc.



Yet, economic blocs hurt more than simply exporting firms. When doing business with other governments, it is common practice for countries to purchase and sell foreign currencies. The British currency's exchange for the Euro with its European counterpart is a prime example of this. The trade deal among European nations enhanced the Euro's worth, but it hurts those that are not part of it.



For instance, if a foreign currency were to increase, the value of the US dollar would fall relative to it, which might lead to higher inflation in the long term.

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