Section+Four+Questions+International+Economics

 23 (b) Explain the advantages and disadvantages of joining a trading bloc (15 marks)   Trading bloc is an agreement wherein a group of countries agree to trade freely with each other while each country is able to trade with any non-member country in any way they want to. There are several advantages and disadvantages of joining a trading bloc.  One of the primary advantages is that joining a trading bloc opens access to a greater size of market (a larger export market). Increased competition lends to greater efficiency and more productivity. From the consumers’ point of view, there is a greater choice of goods with lower prices. As mentioned previously, trading bloc expands the size of the market for firms of all countries involved. This will trigger faster and higher investment rates. In addition to that, joining trading blocs encourage greater political stability and cooperation amongst the countries involved. Lastly, the bargaining power of members increases and so they may be able to exercise greater economic leverage.   Though there are advantages, trading blocs also have disadvantages. The most important disadvantage is that the role of the World Trade Organization is undermined. There are chances that the world may split into major blocs, thus impeding trade liberalization. This will naturally hinder WTO goals and undermine international trade rules. Joining trading blocs may negatively affect small economics which have little bargaining power. Also smaller domestic producers may not be able to compete in big markets. Economic integration may also take away a country’s political sovereignty as decisions will be made by a central body of the bloc – this will naturally reduce the power of the domestic government. Furthermore discriminatory policies are adopted against nonmembers leading to possible political tension and hindering diplomatic relations. Such discriminatory policies could be in the for of protectionist measures like tarrifs on imports. Tariffs are taxes on imported goods which tend to raise the domestic price, while increasing domestic production and lowering consumption of imported goods. The graph below illustrates the effect of a tariff in a domestic market. As illustrated in the graph below, tariff will raise the domestic price from P to P1. Consequently domestic production will increase from Q1 to Q3 while domestic consumption will fall from Q4 to Q3. This will shrink the volume of imports to Q3Q4. Consquently import revenue will decreases negatively affecting exporting firms in countries outside the trading bloc.  = A tariff on imports:  = =

=