Trade blocs are created when two or more countries -- usually within the same geographical region -- agree to eliminate or reduce trade barriers. While these blocs increase trading activities among participating states, they can cause the failure of weak industries, lead to creation of trade disputes and advance the loss of economic independence in weaker states.
When countries agree to eliminate trade barriers, they create a free trade area allowing their businesses to engage in cross-border transactions without incurring any taxes. Immature or unstable businesses in any of the member states face a greater risk of collapsing, since large companies can export a large volume of goods to a foreign market and sell cheaply to eliminate the foreign competitors.
To fully benefit from the increased trading activities that come with trading blocs, countries often specialize in producing and exporting certain goods, while importing others from any of the member countries. This gives rise to economic dependency, meaning a country that is dependent on others for essential goods can experience a crisis if the trading bloc is dissolved.
Trading blocs enable member countries to economically segregate themselves from non-members. In retaliation, the non-members can also form their own trade blocs and impose heavy tariffs against countries from rival trading blocs. This can lead to trade disputes. In 2002, Brazil -- a major cotton exporter and a member of MERCOSUR -- filed a cotton dispute against the U.S. at the World Trade Organization because of the latter's allegedly unfair export subsides on cotton. According to the International Trade Administration, Brazil threatened to impose up to 100 percent duty on several American products in retaliation. The case was settled in June 2010.
When trading blocs impose high barriers against non-member countries, trade diversion can occur. This means traders in the member countries will shy away from exporting to, or importing goods from nations outside the bloc, and instead shift the trade to another country within the bloc. If an exporting country that largely relied on tariffs for national revenue is forced to shift trade to a member country, it may lose revenue.