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Why do we need Trading Blocs in International Trade?

Natural and Cultured Stones
From Ecuador
To France
727 views / 0 experts
May 07, 2020
International Trade has become a necessity, not now a days, but long ago.In the modern era, marked by Globalisation, there has been an amazing increase in the level of International Trade.My humble submission is that what is the rationale of having Trading Blocs, in case we are really living in the era of true Globalisation.

3 answers

May 26, 2020
I suppose that criticisms is also there for trade blocs. However, Many advocates of global free trade are opposed to trading blocs. Trade blocs are seen by them to encourage regional free trade at the expense of global free trade.Those who advocate for it claim that global free trade is in the interest of every country, as it would create more opportunities to turn local resources into goods and services that are both currently in demand and will be in demand in the future by consumers.However, scholars and economists continue to debate whether regional trade blocs fragment the global economy or encourage the extension of the existing global multilateral trading system
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May 07, 2020
I agree with Mr. Leon Lacroix that close geographical proximity plays a crucial role in increasing trade. However, as the gravity model suggests, the size of the economy also determine the volume of trade. Distance between two trading partner may increase the logistic cost. Yet, it might be compensated by the large trade volume. Thus, both distance and size of the economy would be determining factors in forming a trading bloc.I also agree that the literature is not clear whether trading bloc would encourage trade creation or trade diversion. It might be both. At the beginning of the trading bloc, trade diversion would occur. Trade among members would replace trade with non-members. Later on, as the welfare of the members increases, trade creation might occur.
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Leon L.
May 07, 2020
Hello, Vincent. Very good question.The idea is that the countries in close geographical proximity could increase trading among themselves and take advantage of lower transport costs. Also, by forming a bloc, they can increase bargaining power vis a vis larger and more powerful countries. However, the literature is not conclusive on the trade creation v. trade diversion. Yes, more trade is created within the bloc but much (maybe all) of it replaces previous trade with outside the bloc countries. Blocs could also be used to create additional trade restrictions - hence the fortress argument.
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