8. Discuss, with examples, the following statement:”the rise of regional trading blocs threatens the free trade progress made by the WTO. ” ? Regional trade blocs compete against each other. Free trade will exist within each bloc, but each bloc will protect its market from outside competition with high tariffs. ?Trade diversion occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area. Eg. United States and Mexico set up a free trade area and imposed tariffs on imports from all countries.
If US previously produced all its own textile at a higher price than Mexico, US would shift production to a cheaper source in Mexico. However, if US previously imported textiles from China, which produced more cheaply then both US and Mexico. Then US is shift from a cheaper resource to a expensive one. WTO rules that tariffs for free trade areas would not be higher or restrictive to outsiders than previously in effect. However, there are other non-tariff barriers, like import quotas. US have to shift to an higher cost place.
The trade diversion effects outweigh the trade creation effects. The regional trade blocs implies a negative effect on economy in US. ?The “trade fortress” may shut out the firms outside of trading areas. EU may raise barriers to imports and investment in certain “politically sensitive” areas, such as autos. ?Long-term improvement in the competitive position of many firms within the free trade areas. Eg, in EU, many firms were limited by high cost structure in their ability to compete in global market.
The creation of a single market result increased competition in EU and many firms reduce their cost structure by rationalizing production. EU companies are becoming effective competitors,and non-EU companies should prepare and lower their cost as well. ?The emerging role of European Commission in competition rules suggests that EU is increasing willing and able to intervene and impose conditions on companies proposing merger and acquisitions.
EU commission blocked a proposed merger between two US telecommunication companies in Europe, because their combined holdings of Internet infrastructure in Europe would give them so much market power to dominate the market. The commission limits the ability of firms to pursue company strategy of their choice. Commission try to maintain the level of competition by constrain the strategic options of firms.