International trade blocs occur when multiple countries join together in a formal preferential trading arrangement to the exclusion of other countries. The best example of a successful trade bloc is the European Union, where intra-indsutry trade dominated its members, even before it became a customs union in 1957. The formation of a trade bloc provides several advantages to its members. Consumers benefit from the reduction in import prices while producers face an enlarged market, generating economics of scale. Trade blocs mostly impact the global economy because they increase economic integration between the countries in the bloc. On the other hand there are certain problems causes by globalisation, these problems are addressed by what are called International organisations and their role is to deal with the problems created by globalisation and trade such as the WTO. Both trade blocs and international organisations influence financial and global trade flows.
The major impact trade blocs have on global trade is how they adjust progress towards global free trade, a major argument is whether preferential trade agreements, which have led to the formation of trading blocs obstruct progress towards global free trade because they slice the world up into separate areas (e.g. European Union) or if they assist global trade. Trade blocs such as NAFTA, EU and the APEC forum influence global trade flows because the countries within these blocs are trading regionally instead of globally, between 1980 and 2002 trade within the APEC, EU, NAFTA and the ASEAN trade blocs have risen by as much as 25% and trade outside their agreements has decreased by as much as 15%. Around 60% of European trade occurs within the European Union, demonstrating both its vast size and its tendency to be more closed trade bloc due to protectionist policies. On the other hand, the ASEAN countries primarily trade with countries outside their region, reflecting the fact that they are smaller economies and their economic growth strategies have centered on exports to industrialised economics. These figures shows that the formation of trade blocs leads to increasing exports for the countries inside the agreement, whether it be a free trade agreement or a customs union. Although there are many trade agreements or trade blocs around the globe, there has not been a single bloc except the EU has fulfilled the requirements for the first steps towards economic integration. A major problem for trade blocs such as APEC is the differences in political regimes. Nevertheless trend agreements will still be formed and trade barriers will be decreasing. Trade blocs also have an impact on countries that are not part of the agreement for example; the APEC forum has great significance for Australia since more than tree quarters of Australian merchandise exports go to countries that are members of the APEC forum. The Industry Commission estimated that the APEC agreement would result in a boost to Australia’s national output of 6.8% and create 500 000 jobs by 2010.
The WTO, World Trade Organisation is one of the most powerful economic institutions. It is an international organisation that deals with problems created by globalisation and has a greater impact than any other organisation on global trade. The role of the WTO is to implement and advance global trade agreements. Over the years the WTO has held a series of rounds of negotiations aimed at reducing trade barriers among its members. In its first years in operation the WTO has generally been effective in ensuring that countries comply with global trade rules. The WTO has a major impact of countries around the globe, for example if a country involved in a dispute does not comply with the WTO’s directive, the other country may then impose trade sanctions that may include high tariffs on goods imported from the offending nation. The increase in trade between countries since World War II is attributable to the reduction in tariffs barriers brought about by eight successive rounds of multilateral trade negotiation under the auspices of what is now the World Trade Organisation. Economists regard free trade as a highly desirable objective. Not only does it lead to increased output as new markets open up to exporters, and widen consumer choice, but it also lowers prices through increased competition and lower costs due to increased economies of scale and the increased efficiency derived from greater specialization. Despite all these advantages against protection, most countries are still reluctant to commit themselves completely to free trade. They remain keen to provide their own industries with a competitive edge, by either subsidising specific industries or making importers face substantial hurdles. There are several arguments in favour of the protection of domestic industries and several arguments against protection, encouraging free trade. A major argument for protecting domestic industries is to prevent dumping, which occurs when foreign firms attempt to sell their goods at lower prices in another country’s market at unrealistically low prices compared to the price charged in the home country’s market. Local industry that could normally compete with such foreign producers may be forced out of business, causing a loss in a country’s productive capacity and higher unemployment. Anti-dumping duties are allowed under the WTO rules if it can be proved that dumping is harming a domestic industry. The US and, more recently, India have been the most active users of anti-dumping duties, as well as China. A popular argument in favour of protectionism is the concept of the infant industry, these industries will struggle with high costs in the short term but is expected to provide net benefits in the long term, and therefore it needs assistance by the government to make it to the long term. A traditional argument against protecting infant industries is that governments don’t know if these industries are going to succeed, so the government may end up assisting industries without a future, at taxpayers’ expense. A number of arguments for protection have little serious economic backing. The employment concept of ‘save our jobs’ is one such argument because jobs saved in the protected import industry must be compared to the import servicing industry. ‘Unfair competition’ from poor countries is another such popular argument. There is also the ‘keep money in the country’ argument, such as ‘Buy Australian First’, which is suggesting that consumers should buy a locally made product irrespective of price and quality. Finally, governments also have non economic reasons for protecting their industries, such as defence reasons as countries having to rely on imported-related products being afraid of shortages in time of war. Economists believe that protection from foreign competition is bad for the local economy because of its adverse effects on consumers and other local industries, not just bad for the countries whose exports are kept out.
The International Monetary Fund (IMF) has the role to maintain international financial stability just like the WTO controls global trade. The IMF is arguable the most important institution in the global economy. In situations where a financial crisis occurs in a country the IMF plays a critical role in minimizing the crisis. In early 2004 the IMF had $US107 billion in outstanding loads to 87 developing countries. The IMF’s policy is to support free trade of goods, services, capital and finance throughout the global markets. Many people argue that the IMF makes conditions worse and like the WTO, it now attracts large protest rallies from critics of globalisation at its meetings. Another organisation that influences financial flows around the world is the World Bank, its’ role is to help the poorer countries with their economic development and help countries adjust to globalisation. The World Bank is funded by contributions from other countries and gives loads to developing countries.
Globalisation is growing and there is an ongoing demand for free trade and a greater demand for international organisations to help financial and trade flows so that all countries benefit from globalisation. Free trade agreements are being passed regularly and more and more countries are trading freely and discouraging the barriers to trade.
