What Are the Benefits of Trade Bloc Agreements?

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A trading bloc is an economic alliance of different nations. The bloc members give each other special benefits they don't offer other countries, such as reducing tariffs and other barriers to trade. NAFTA, the North American Free Trade Agreement, is an example of a trade bloc agreement involving Canada, Mexico and the United States.

Advantages for Nations

International Democracy Watch says NAFTA benefits the nations involved by promoting regional cooperation. All three countries make money from their mutual trade, so they have a vested interest in each other's stability.

In 2005, for example, the NAFTA trade bloc launched a security partnership to protect what one United States official described as the "economic space" created under NAFTA. Under the partnership agreement, Mexico and the United States have worked together to tighten border security. In 2008-09, Mexico received $400 million from the United States for its military, judicial and police operations.

United trade blocs such as NAFTA or the European Union can wield more clout than when nations go to the bargaining table alone. In 2013, for example, the British magazine New Statesmen argued that the United Kingdom was better off in trade negotiations as part of the EU -- a bloc of 27 countries and 500 million people at the time -- than if it tried to strike deals with Japan or the United States by itself.

Gains for Business

Businesses inside one trading bloc nation benefit from trade in multiple ways:

  • The removal of trade barriers opens up new markets. For example, the Confederation of British Industry says being able to sell goods in a tariff-free European Union has been a huge boost to British business.
  • Businesses outside the bloc still face the old restrictions, so in-bloc firms have an edge.
  • Knowing there's an expanded market for their products makes it easier for businesses to specialize.
  • If the business spreads over a larger area, it can develop economies of scale.
  • Free trade agreements have weakened or eliminated some environmental and other regulations on the grounds they're barriers to trade. That allows businesses to operate free of those regulations.

Twenty years after NAFTA became law, Bloomberg Business said that United States exports to Mexico and Canada had grown 370 percent and 201 percent, respectively. Mexican and Canadian businesses have increased their exports to the United States as well. The magazine says it's not easy to measure how much of the increase is due to NAFTA rather than other factors.

Benefits for Individuals

By eliminating tariffs and opening up trade with other nations, trade bloc agreements can increase competition. Businesses from different nations within the bloc can compete on a level playing field, making it easier for consumers to find better quality merchandise at lower prices. In-country businesses can lower their own prices by outsourcing work to other nations within the bloc where manufacturing costs are cheaper.

Employees may benefit from free-trade agreements too: Growing businesses need more workers, or may increase revenue enough to raise wages.

The European Commission website lists some of the advantages for individuals of their nations belonging to the EU:

  • The use of the euro as a common currency makes it easier to compare prices.
  • Travel costs are lower as there's no need to exchange money at borders.
  • As companies find it easier to invest across borders, this creates more jobs.

Drawbacks

Trade bloc agreements have their share of drawbacks:

  • Workers may lose jobs as employers outsource work to trading partners with a lower minimum wage.
  • Trade barriers against nations outside the bloc may keep out competitive products. That benefits bloc businesses, but it's a drawback for consumers.
  • Residents of the trade bloc nations may suffer if trade agreements exempt businesses from environmental or safety regulations.
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