Why are trade blocs formed? And what are its advantages and disadvantages ?



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Posted on (Answer #1)

Trade blocs result when a number of country's governments act in unison to engage or not engage in trade and commerce with another country or set of countries.  The biggest of these in recent history was the division between the former Soviet Union and satellite countries as one bloc and most of Europe, the United States, and other allied countries as another.  The advantage is that a bloc may help foster a political agenda (like the US not trading with Cuba) and act as a protectionist organization to keep out competitors, but these are only advantages in the short term.  History has shown, in the British Empire and Soviet Union, for example, that long term trade blocs encourage the creation of Black Markets, and cause non-members to economically "move around" a bloc, which actually fosters innovation and efficiency in the non-bloc countries!  The end result is that the bloc countries become isolated, and although trade may be brisk within, its goods and services become obsolete relative to the non-bloc countries.

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