The significant shifts in the development of global trade in the 20th century provoked the emergence of the new phenomena in the international trade organization. The regional free trade agreements can be regarded as one of these phenomena. The free trade concept was introduced in “Theory of Comparative Advantage” by David Ricardo who claimed that the nations will attain significant benefits by specializing in production of goods and services that they can create more efficiently and cheaper and then trade these products with other countries which fail to produce them as effectively (Price, 2011a).
Nowadays, the trend of global division into the trade blocs gathers momentum. The USA and the European Union actively support the free trade policies by cooperating with the neighboring countries. The economic bloc parties persecute the national financial interests by preventing competitors from entering into the agreements in the same regions. By the end of the 20th century, there were nearly one hundred international economic blocs in the world. According to the World Bank’s estimations, about a half of the global international trade operations is conducted within these regional trade zones (World Bank, 2000).
Many political, economic, and historical processes provoke the formation of the economic trade blocs. However, it is observed that the emergence of the free trade zones doesn’t make significant changes in the global economy as it was expected (Kandogan, 2008). Within the boundaries of the trade zones, the trade among countries included in the blocs evolves. But, at the same time, regional agreements create hindrances for the global trade development. The regional trade agreements can be regarded as the closed phenomena; therefore, they prevent the liberalization of trade.
According to findings in the previous research, one of the potential advantages of the international multilateral trade agreements is the development of relationships among the number of countries involved in these agreements. In the trade blocs, the cross-country trade barriers between the parties are decreased or completely removed, and it is expected that all the participants attain the relevant benefits (Trade blocs and common markets, 2015, par. 2). However, it is observed by many researchers, that the current trade agreements usually do not support multilateral interests and are bilateral in their nature. According to Daniel Kono (2007), the regional trade blocs do not provoke trade liberalization and, on the contrary, create barriers for it (p. 165).
The main economic bloc in which the USA is represented is the North American Free Trade Agreement (NAFTA). NAFTA was adopted in 1993 and is considered “successful in eliminating trade barriers” among the three nations: the USA, Mexico, and Canada (Price, 2011b). Throughout the history of its existence, the agreement has provoked positive changes in the development of national industries and finance. One of the evident advantages of NAFTA is the reduction of trade tariffs. The goods from Mexico and Canada are imported with the lower tariffs, and the given products are thus more affordable for the American citizens than the products imported from the other countries. On the other hand, when allowing the partner countries to purchase American products at cheaper costs, the demand for these products increases. As the result, the significant positive financial results are achieved.
Overall, throughout the period of NAFTA’s existence, the trade relationships between Mexico, Canada, and the USA improved. According to financial reports, in 2009, the U.S. profit from trade with NAFTA partners was equal to $1.6 trillion (Fontinelle, 2012, par. 4). Moreover, the industrial and business integration among the countries was enhanced significantly, and the international enterprises launched in the USA provoked the increase in the number of workplaces.
However, the potential disadvantages of NAFTA are also related to the American citizens’ employment. When the process of the business integration is of multilateral character, the relocation of the U.S. organizations to Canada or Mexico may be regarded as the causal factor for the loss of the workplaces.
When evaluating the situation at the global scale, NAFTA’s disadvantage is in its ineffectiveness in terms of the global free trade conception. For example, when the USA imports the Mexican goods because of the lower tax and tariff policies, but, at the same time, it is known that some Asian countries have more significant advantages in the production of the same goods than Mexico, then the international trade may be regarded as ineffective.
There are many barriers and obstacles on the way to the unification of the international trade system in the global market. These barriers are mainly caused by the controversies and differences in the countries’ interests emerging in the interrelation processes of the separate countries and the regional economic blocs. According to Kono (2007), the regional trade agreements weaken the mechanisms of the international trade regulation elaborated by the World Trade Organization (WTO), and they thus prevent the development of the world trade integration (p. 178). Therefore, the adoption of the unified rules for the trade bloc formation is of significant importance. And it is vital for the trade blocs’ participants to comply with WTO’s regulations and norms. Based on this, it is possible to say that trade agreements must become more open and must allow the inclusion of a wider number of participants. In this way, the positive solution for the current issues in the global trade market may be found.
Fontinelle, A. (2012). Pros and cons of NAFTA. Investopedia. Web.
Kandogan, Y. (2008). Consistent estimates of regional blocs’ trade effects. Review of International Economics, 16(2), 301–314.
Kono, D. (2007). When do trade blocs block trade? International Studies Quarterly, 51, 165–181.
Price, G. D. (2011a). Free trade. In C. Clark (Ed.), The American economy: A historical encyclopedia. Santa Barbara, CA: ABC-CLIO. Web.
Price, G. D. (2011b). North American free trade agreement (NAFTA). In C. Clark (Ed.), The American economy: A historical encyclopedia. Santa Barbara, CA: ABC-CLIO. Web.
Trade blocs and common markets. (2015). Web.
World Bank. (2000). Trade blocs. Web.