Lesson 2 - Page 4 - Why do countries form alliances to engage in trade?
As we have seen, the global economy is composed of
several interacting elements. Among the most significant are regional
economic blocs within which most of the world's trade takes place. The
emergence of economic blocs is a relatively recent phenomenon (Angliss,
et al, 2001). NAFTA is one example of an economic bloc. Here are some
other important economic blocs around the world:
Europe
An important economic trading bloc is found in Western
Europe where the Treaty of Rome (signed in 1957) established the
European Economic Community (EEC). The first ÔInner Six' signatories
were Belgium, France, Italy, Luxembourg, the Netherlands and (the former
West) Germany. 1973 marked the admission of the United Kingdom, Ireland
and Denmark, and the EEC saw the addition of Greece in 1981 and Spain
and Portugal in 1986. The German re-unification of 1990 allowed for the
first time an East European nation to integrate with Western Europe. The
European Union (EU) was established in 1993 and replaced the European
Economic Community by offering an increased level of economic
integration between its members, notably via a common currency (the
"Euro"). EU integration also focused upon the setting up of "four great
freedoms" to include the 'free' circulation of people, goods, services,
and capital.
Membership in the EU continued to grow through the
1990s. Austria, Sweden, and Finland joined the EU in 1995. On May 1st,
2004, the EU expanded yet again, this time extending membership to many
Eastern European countries, including the Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Poland, the Slovak Republic, and Slovenia.
Two Mediterranean island-nations, Cyprus and Malta, were also included.
After this expansion, the EU membership increased to twenty-five
countries.
Pacific Asia
Pacific Asia represents a part of the world that has
experienced strong economic growth over the last two decades. It
includes:
- Japan. While Japan itself is not an economic bloc, its industrial, commercial, and financial strength makes it the second largest economy in the world with a population of 125 million people. Japanese companies manufacture products using raw materials imported from several nations (e.g. Australia for iron, Indonesia for oil) and by setting up plants in countries with cheaper labor (e.g., China, Malaysia, and Vietnam).
- The Association of Southeast Asian Nations. ASEAN was founded in 1967 and represents an economic bloc that has a strong potential for development, but also several integration problems. Many of these problems are related to the fragile political conditions of the region (found in Myanmar, Cambodia, and Vietnam). ASEAN accounts for a growing market and significant natural resources (e.g. oil, lumber, and minerals). The integration of Indochina (Cambodia, Laos, and Vietnam) offers a supplementary development potential, particularly for Vietnam, which joined ASEAN in 1995. This brought the total ASEAN population close to 460 million people. But attempts at integration have been hampered by the tendency of these Asian countries to act as competitors rather than as partners.
- China and the "Four Dragons". Although China is not itself an economic bloc, its demographic weight (1.3 billion inhabitants) and its recent and phenomenal industrial development makes it the leading manufacturing center of the global economy. The "Four Dragons" (South Korea, Taiwan, Hong Kong and Singapore) have also experienced very dynamic industrial development, but their demographics, based upon 75 million inhabitants, are still relatively weak in relation to the Chinese Ôgiant'. Alliances with these countries offer China a potential for even greater integration into the global economy while providing for an already established commercial network. There are signs that this process is emerging with Taiwanese and Hong Kong investments having played a significant role in the recent development of China.
Latin America
- The Association for Latin American Integration. The ALAI (founded in 1980) is a group of more or less structured Central and South American nations. It is an adaptation of the failed Latin American Free Trade Association (LAFTA; 1960). The new agreement is less restraining than LAFTA and aims to enlarge the regional market of Latin American businesses while allowing for economies of scale and increased competitiveness at the international level. Most South American nations have policies protecting their indigenous industries, thus breaking up the continent into a set of national markets.
- The Central American Common Market. The CACM was initially formed in 1961 and includes Costa Rica, Nicaragua, Honduras, El Salvador, and Guatemala, for a total of 30 million people. The war between El Salvador and Honduras dissolved the association in 1971. However, in 1991 these countries agreed to fully re-establish the association.
- The Caribbean Community. Caricom consists of fourteen small-sized countries, situated along the Caribbean Sea, and including 6 million inhabitants. It is the smallest "economic bloc" in America, if not of the world.
- The Andean Pact. This agreement, signed in 1969, liberalized trade between Bolivia, Colombia, Ecuador, Peru and Venezuela. Political instability, notably for Venezuela, continues to threaten the Pact's free trade goals, as does drug production (cocaine), which constitutes a significant part of the economy of Peru, Colombia, and Ecuador.
- Mercosur. This free-trade agreement was signed in 1991 by Argentina, Brazil, Paraguay and Uruguay. It was established mainly because Argentina and Brazil opted for a democratic regime in 1985, an act that encouraged the establishment of a bilateral commercial agreement the same year. Mercosur, by virtue of its large population (200 million), is the third largest economic bloc behind NAFTA and the EU, but its internal trade is weak. In spite of several integration problems, Mercosur is the most coherent economic bloc in Latin America.
Collaborative Learning Activity 2.1 - How do regional economic blocs affect global trade relationships?
In the next activity, your team will analyze data that
describe how economic blocs affect the production and trade of one of
the world's most important commodities, oil. Your team will also look at
oil production data for members of the Organization of Petroleum
Exporting Countries (OPEC), an international organization of developing
countries that are heavily reliant on oil revenues as their main source
of income. There are currently twelve members of OPEC: Algeria, Gabon,
Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia,
United Arab Emirates, and Venezuela.
Summary
Trade helps countries get goods that they cannot easily
make for themselves. To understand trade between countries, we
considered political alliances or cultural connections that facilitate
trade, as well as political issues or cultural differences that can
restrict trade.
The volume of exchanged goods and services between
nations has an increasingly significant role in the generation of
wealth. Three main factors can be linked to this process:
- Production systems are more flexible, which encourages exchanges of commodities and services. Direct foreign investments are commonly linked with globalization as corporations invest abroad in search of lower production costs and new markets.
- Transportation costs have decreased significantly as a result of technology innovations and a growth of the efficiency of transport infrastructures. As a result, the transferability of commodities has improved.
- Integration processes such as the emergence of economic blocs and the decrease of tariffs at a global scale have promoted trade.
Next, in Lesson 3, your team will explore the roles of
the multinational corporation (MNC) in the global economy. MNCs produce
many of the products that are traded in the global economy, yet many
scientists and policymakers have questioned the local practices of MNCs
and the large amounts of wealth under their control. We will consider
this debate in more detail in Lesson 4.
Review of Materials Due
Before your team proceeds to the next lesson, each local group should:
- Submit your group's "oil trade response sheets" to your instructor (Collaborative Learning Activity 2.1).
- Post answers to all "blue box" discussion questions in the Group Discussion Board.
Please begin Lesson 3 on the date assigned by your instructor.
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for the procedures to follow.