Regional Blocks in International Trade

On line Study Materials for M. Sc.
2nd Semester, Paper 202, Unit 16
Regional blocks in international trade: SAARC, OPEC, EU
A regional trading block is a group of countries within a geographical region that protect
themselves from imports from non-members. In general terms, regional trade blocks are
associations of nations at a governmental level to promote trade within the block and defend
its members against global competition. Defence against global competition is obtained
through established tariffs on goods produced by member states, import quotas, government
subsidies, onerous bureaucratic import processes, and technical and other non-tariff barriers.
Since trade is not an isolated activity, member states within regional blocks also cooperate in
economic, political, security, climatic, and other issues affecting the region.
In terms of their size and trade value, there are four major trade blocks and a larger number of
blocks of regional importance. Trading blocs are a special type of economic integration.
There are four types of trading blocs −
 Preferential Trade Area − Preferential Trade Areas (PTAs), the first step towards
making a full-fledged RTB, exist when countries of a particular geographical region
agree to decrease or eliminate tariffs on selected goods and services imported from
other members of the area.
 Free Trade Area − Free Trade Areas (FTAs) are like PTAs but in FTAs, the
participating countries agree to remove or reduce barriers to trade on all goods
coming from the participating members.
 Customs Union − A customs union has no tariff barriers between members, plus
they agree to a common (unified) external tariff against non-members. Effectively,
the members are allowed to negotiate as a single bloc with third parties, including
other trading blocs, or with the WTO.
 Common Market − A ‘common market’ is an exclusive economic integration. The

member countries trade freely all types of economic resources – not just tangible
goods. All barriers to trade in goods, services, capital, and labor are removed in
common markets. In addition to tariffs, non-tariff barriers are also diminished or
removed in common markets.
Dr. Swapan Kumar Maity, Assistant Professor of Geography, Nayagram P.R.M. Govt. College
On line Study Materials for M. Sc. 2nd Semester, Paper 202, Unit 16
Regional Trading Blocs – Advantages

The advantages of having a Regional Trading Bloc are as follows −
 Foreign Direct Investment − Foreign direct investment (FDI) surges in TRBs and it
benefits the economies of participating nations.
 Economies of Scale − The larger markets created results in lower costs due to mass
manufacturing of products locally. These markets form economies of scale.
 Competition − Trade blocs bring manufacturers from various economies, resulting in

greater competition. The competition promotes efficiency within firms.
 Trade Effects − As tariffs are removed, the cost of imports goes down. Demand
changes and consumers become the king.
 Market Efficiency − The increased consumption, the changes in demand, and a

greater amount of products result in an efficient market.
Regional Trading Blocs – Disadvantages

The disadvantages of having a Regional Trading Bloc are as follows −
 Regionalism − Trading blocs have bias in favor of their member countries. These
economies establish tariffs and quotas that protect intra-regional trade from outside
forces. Rather than following the World Trade Organization, regional trade bloc
countries participate in regionalism.
 Loss of Sovereignty − A trading bloc, particularly when it becomes a political union,

leads to partial loss of sovereignty of the member nations.
 Concessions − The RTB countries want to let non-member firms gain domestic
market access only after levying taxes. Countries that join a trading bloc needs to
make some concessions.
 Interdependence − The countries of a bloc become interdependent on each other. A

natural disaster, conflict, or revolution in one country may have adverse effect on the
economies of all participants.
The South Asian Association for Regional Cooperation (SAARC):
Name: South Asian Association for Regional Cooperation

Acronym: SAARC
Year of foundation: 1985
Headquarters: Kathmandu, Nepal
The South Asian Association for Regional Co-operation (SAARC) is an organisation of

South Asian nations, which was established on 8 December 1985 when the government of
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka formally adopted its
charter providing for the promotion of economic and social progress, cultural development
within the South Asia region and also for friendship and co operation with other developing
countries. The Secretariat of the Association was set up in Kathmandu on 17 January 1987.
It is dedicated to economic, technological, social and cultural development emphasising
collective self- reliance. In terms of population, its sphere of influence is the largest of any
regional organisation. In April 2007, Afghanistan became its eighth member.
OBJECTIVES:
The objectives of the Association as outlined in the SAARC Charter are:
1) to promote the welfare of the peoples of South Asia and to improve their quality of
life;
2) to accelerate economic growth, social progress and cultural development in the region
and to provide all individuals the opportunity to live in dignity and to realize their full
potentials;
3) to promote and strengthen collective self-reliance among the countries of South Asia;
4) to contribute to mutual trust, understanding and appreciation of one another's
problems;
5) to promote active collaboration and mutual assistance in the economic, social,
cultural, technical and scientific fields;
6) to strengthen cooperation with other developing countries;
7) to strengthen cooperation among themselves in international forums on matters of
common interests; and
8) to cooperate with international and regional organizations with similar aims and
purposes.
Decisions at all levels are to be taken on the basis of unanimity; and bilateral and
controversial issues are excluded from the deliberations of the Association.
The SAARC Secretariat:

The SAARC Secretariat is based in Katmandu. It coordinates and monitors implementation
of activities, prepares for and services meetings, and serves as a channel of communication
between the Association and its Member States as well as other regional organizations. The
Secretariat is headed by the Secretary General, who is appointed from Member States in
alphabetical order for a three-year term by the SAARC Council of Ministers. The Secretary
General is assisted by eight Directors on deputation from Member States. The SAARC
Secretariat and Member States observe 8 December as the SAARC Charter Day.
The Organization of the Petroleum Exporting Countries (OPEC):
Brief history and members:

The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad,
Iraq, with the signing of an agreement in September 1960 by five countries namely Islamic
Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They were to become the
Founder Members of the Organization.
These countries were later joined by Qatar (1961), Indonesia (1962), Libya (1962), the
United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975),
Angola (2007), Equatorial Guinea (2017) and Congo (2018).
Ecuador suspended its membership in December 1992, rejoined OPEC in October 2007,
but decided to withdraw its membership of OPEC effective 1 January 2020. Indonesia
suspended its membership in January 2009, reactivated it again in January 2016, but decided
to suspend its membership once more at the 171st Meeting of the OPEC Conference on 30
November 2016. Gabon terminated its membership in January 1995. However, it rejoined the
Organization in July 2016. Qatar terminated its membership on 1 January 2019.
This means that, currently, the Organization has a total of 13 Member Countries.
The OPEC Statute distinguishes between the Founder Members and Full Members –
those countries whose applications for membership have been accepted by the Conference.
The Statute stipulates that “any country with a substantial net export of crude petroleum,
which has fundamentally similar interests to those of Member Countries, may become a Full
Member of the Organization, if accepted by a majority of three-fourths of Full Members,
including the concurring votes of all Founder Members.”
The Statute further provides for Associate Members which are those countries that do not
qualify for full membership, but are nevertheless admitted under such special conditions as
may be prescribed by the Conference.
Goals of OPEC:
1) OPEC's first goal is to keep prices stable. It wants to make sure its members get a
reasonable price for their oil. Since oil is a somewhat uniform commodity, most
consumers base their buying decisions on nothing other than price. What's the right
price? OPEC has traditionally said it was between $70 and $80 per barrel. At those
prices, OPEC countries have enough oil to last 113 years. If prices drop below that
target, OPEC members agree to restrict supply to push prices higher.
But Iran wants a lower target for prices of $60 a barrel. It believes a lower price will
drive out U.S. shale oil producers who need a higher margin. Iran's break-even price
is just over $50 a barrel. Saudi Arabia needs $70 a barrel to break even. That price
includes exploration and administrative costs.
Saudi Arabia's flagship oil company, Aramco, can pump the oil at $2 to $20 a barrel.
Saudi Arabia has cash reserves to allow it to operate at lower prices. But it is a
hardship the country prefers to avoid. Like other OPEC members, it relies on
petrodollars for government revenues.
Without OPEC, individual oil-exporting countries would pump as much as possible to
maximize national revenue. By competing with each other, they would drive prices
even lower. That would stimulate even more global demand. OPEC countries would
run out of their most precious resource that much faster. Instead, OPEC members
agree to produce only enough to keep the price high for all members. to explore its
shale oil fields. U.S. companies used fracking to open up the Bakken oil fields for
production. As a result, non-OPEC supply increased.
2) OPEC's second goal is to reduce oil price volatility. For maximum efficiency, oil
extraction must run 24 hours a day, seven days a week. Closing facilities could
physically damage oil installations and even the fields themselves. Ocean drilling is
difficult and expensive to shut down. It is then in OPEC's best interests to keep world
prices stable. A slight modification in production is often enough to restore price
stability.
For example, in June 2008, oil prices hit an all-time high of $143 per barrel. OPEC responded
by agreeing to produce a little more oil. This move brought prices down. But the global
financial crisis sent oil prices plummeting to $33.73 per barrel in December. OPEC
responded by reducing the supply. Its move helped prices to again stabilize.
3) OPEC's third goal is to adjust the world's oil supply in response to shortages. For
example, it replaced the oil lost during the Gulf Crisis in 1990. Several million barrels
of oil per day were cut off when Saddam Hussein's armies destroyed refineries in
Kuwait. OPEC also increased production in 2011 during the crisis in Libya.
In 2018, it exported 25 million barrels of crude oil a day. That's 54% of the total world
exports of 46 mbd. OPEC members hold 82% of the world's proven oil reserves. OPEC's
decisions have a significant impact on future oil prices.
The Oil and Energy Ministers from the OPEC members meet at least twice a year to
coordinate their oil production policies. Each member country abides by an honor system in
which everyone agrees to produce a certain amount. If a nation winds up producing more,
there is no sanction or penalty. Each country is responsible for reporting its own production.
In this scenario, there is room for "cheating." A country won't go too far over its quota though
unless it wants to risk being kicked out of OPEC.
Despite its power, OPEC cannot completely control the price of oil. In some countries,
additional taxes are imposed on gasoline and other oil-based end products to promote
conservation. Oil prices are also set by the oil futures market. Much of the oil price is
determined by commodities traders. That's the underlying reason why oil prices are so high.
Recent Decisions:
On December 7, 2018, OPEC agreed to cut 1.2 million barrels per day. Members would cut
800,000 bpd. Allies would cut 400,000 bpd. Its goal is to return prices to $70 a barrel by early
fall 2019. In November, average global oil prices had dropped to $65 bpd. Commodities
traders had bid prices down. They believed higher U.S. supplies would flood the market with
supply at the same time slowing global growth would cut into demand.
On November 30, 2017, OPEC agreed to continue withholding 2% of global oil supply. That
continued the policy OPEC formed on November 30, 2016, when it agreed to cut production
by 1.2 million barrels. As of January 2017, it would produce 32.5 mbd. That's still above its
average 2015 level of 32.32 mbpd. The agreement exempted Nigeria and Libya. It gave Iraq
its first quotas since the 1990s. Russia, not an OPEC member, voluntarily agreed to cut
production.
The cut came a year after OPEC had raised its production quota to 31.5 mbpd on December
4, 2015. OPEC was struggling to maintain market share. Its share fell from 44.5% in 2012 to
41.8% in 2014. Its share fell because of a 16% increase in U.S. shale oil production. As the
oil supply rose, prices fell from $108.54 in April 2012 to $34.72 in December 2015. That was
one of the biggest drops in oil price history.
OPEC waited to cut oil production because it didn't want to see its market share drop further.
It produces oil more cheaply than its U.S. competition. The cartel toughed it out until many
of the shale companies went bankrupt. That created a boom and bust in shale oil.
The European Union (EU):

The European Union is a unified trade and monetary body of 27 member countries. It
eliminates all border controls between members. The open border allows the free flow of
goods and people, except for random spot checks for crime and drugs. Any product
manufactured in one EU country can be sold to any other member without tariffs or duties.
Practitioners of most services, such as law, medicine, tourism, banking, and insurance, can
operate in all member countries. As a result, the cost of airfares, the internet, and phone calls
are typically lower than in the United States.
Member countries:
As of 2018, the European Union has 28 members - all European countries. The countries
comprising the European Union are Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia,
Slovenia, Spain, Sweden, and the United Kingdom.
However, in 2019, Britain is set to leave the European Union, bringing the total down to 27
countries.
The Schengen Area:

To ensure free passage between countries, the Schengen Area was established for residents of
certain countries - including some non-EU countries. Some countries in the Schengen Area
are Austria, Belgium, Estonia, Finland, France, Germany, Greece, Italy, Latvia, Lithuania,
Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain, Czech Republic,
Denmark, Hungary, Poland, and Sweden, as well as non-EU countries Iceland, Liechtenstein,
Norway and Switzerland. In addition, Bulgaria, Croatia and Romania are pending approval to
enter the Schengen Area as well.
For residents in these countries, passage to and from other Schengen Area countries is much
easier - not requiring visas or showing passports.
Objectives:
The European Union’s main objective is to promote peace, follow the EU’s values and improve
the wellbeing of nations. The European Parliament and other institutions see to it that these
objectives are achieved.
The main objectives are:
A common European area without borders:
The objective is to create a free and safe Europe with no internal borders. The citizens living
in the area enjoy the rights granted by the European Union.
Internal market:
The objective is to ensure smooth and efficient trade within Europe. Competition between
companies is free and fair.
Stable and sustainable development:
The objective is to ensure Europe’s sustainable and steady development. It means balanced
economic growth and stable prices. The European Union seeks to create a competitive market
economy which takes into account people’s wellbeing and social needs. An important issue is
environmental protection. Efforts are made to protect the environment and repair any damage
made.
Scientific and technological development:
The European Union supports the advancement of science and technology and invests in
education. Another objective is to achieve a skilled workforce and a high standard of
technological production.
Prevention of social exclusion:
The European Union works hard to prevent social exclusion. It seeks to prevent people from
drifting outside the labour market and society. Efforts are made to eliminate poverty. The
Union works for equality. Minority rights are protected. Social security is improved. Men and
women must be treated equally. Children’s rights must be protected and children given a
happy childhood. Old people must be looked after and respected.
Solidarity (unity):
Solidarity between countries and people is promoted in the field of the economy, social
equality and regions. The member states must be loyal to one another. It means that states
must take responsibility for and be understanding of one another.
Respect for languages and cultures:

The European Union respects the languages and cultures of the individual countries. National
cultures and the common European culture are cherished and developed.
Common foreign and security policy:
The European Union seeks to promote peace not only in Europe but also elsewhere in the
world. It seeks to ensure that peace is maintained in Europe and that people have security.
With the common foreign policy, the European Union wants to make sure that the resources
of the planet are used sensibly and that the environment is not destroyed. The European
Union also wishes to respect other countries and nations. It works for free and fair trade and
tries to eliminate poverty. Human rights are important all over the world. The European
Union follows the Charter of the United Nations and underlines the importance of common
international rules.
History:
In 1950, the concept of a European trade area was first established. The European Coal and
Steel Community had six founding members: Belgium, France, Germany, Italy, Luxembourg,
and the Netherlands.
In 1957, the Treaty of Rome established a common market. It eliminated customs duties in
1968. It put in place standard policies, particularly in trade and agriculture. In 1973, the
ECSC added Denmark, Ireland, and the United Kingdom. It created its first Parliament in
1979. Greece joined in 1981, followed by Spain and Portugal in 1986.
In 1993, the Treaty of Maastricht established the European Union common market. Two
years later, the EU added Austria, Sweden, and Finland. In 2004, twelve more countries
joined: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland,
Slovakia, and Slovenia. Bulgaria and Romania joined in 2007.
In 2009, the Treaty of Lisbon increased the powers of the European Parliament. It gave the
EU the legal authority to negotiate and sign international treaties. It increased EU powers,
border control, immigration, judicial cooperation in civil and criminal matters, and police
cooperation. It abandoned the idea of a European Constitution. European law is still
established by international treaties.
How Is the European Union Governed?

As mentioned earlier, the European Union is governed by three main bodies – (i) the EU
Council, (ii) the EU Parliament and (iii) the EU Commission.
The Council's main job is to create and propose new policies and legislation for the European
Union; it operates under a different EU president every six months.
The Parliament then debates and passes the laws proposed by the Council, electing members
once every five years.
Finally, the Commission enforces and operates the laws for the European Union - the current
president of which is Jean-Claude Juncker (until 2019).
Additionally, the European Central Bank services the EU's financial needs and manages
things like inflation rates and foreign exchange reserves.
What Currency Does the European Union Use?

Unsurprisingly, the European Union primarily uses the euro as currency, which is reportedly
the second most-used currency in the world, under the U.S. dollar. Once established, the euro
has replaced many of Europe's leading currencies, including French and Italian currencies
like the franc and lira, to name a few. In fact, according to the EU's website, more than 340
million EU citizens in 19 countries use the euro as their currency.
However, not all countries have adopted the euro - with Britain famously holding onto the
pound. The euro, despite being so commonly held, has a fluctuating value - which exchange
traders daily determine in comparison to the U.S. dollar as a standard.
References:
1. Geography. Rajiv Ahir, Spectrum Books Pvt. Ltd. New Delhi. ISBN:
9788179304587, 8179304582. 2012.
2. http://www.yourarticlelibrary.com/economics/trade-economics/saarc-main-objectives-of-
saarc/40408
3. https://www.quora.com/What-are-the-main-objectives-of-SAARC
4. https://www.opec.org/opec_web/en/about_us/25.htm
5. https://www.opec.org/opec_web/en/about_us/24.htm
6. https://www.thestreet.com/politics/what-is-european-union-14690672
7. https://www.thebalance.com/what-is-the-european-union-how-it-works-and-history-
3306356

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On line Study Materials for M. Sc.

2nd Semester, Paper 202, Unit 16

Regional blocks in international trade: SAARC, OPEC, EU

 Common Market − A ‘common market’ is an exclusive economic integration. The

Regional Trading Blocs – Advantages

 Competition − Trade blocs bring manufacturers from various economies, resulting in

 Market Efficiency − The increased consumption, the changes in demand, and a

Regional Trading Blocs – Disadvantages

 Loss of Sovereignty − A trading bloc, particularly when it becomes a political union,

 Interdependence − The countries of a bloc become interdependent on each other. A

The South Asian Association for Regional Cooperation (SAARC):

Name: South Asian Association for Regional Cooperation

Year of foundation: 1985

Headquarters: Kathmandu, Nepal

The South Asian Association for Regional Co-operation (SAARC) is an organisation of

The SAARC Secretariat:

The Organization of the Petroleum Exporting Countries (OPEC):

Brief history and members:

The European Union (EU):

The Schengen Area:

Respect for languages and cultures:

How Is the European Union Governed?

What Currency Does the European Union Use?

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