Benefits of Forming a Trade Bloc in Latin America

Benefits of Forming a Trade Bloc in Latin America

Trade blocs are trading alliances of geographically close countries. They are increasingly becoming influential in international trade. From the outset, trade blocs are agreements between more than two countries (multiple countries) containing rules on how the participant countries will conduct trade. The primary goal of trading blocs is to reduce trade barriers, including quotas, tariffs, and subsidies, and facilitate the free flow of products, services, and people. Some of the leading trading blocks in Latin America include NAFTA, Mercosur, and the Pacific Alliance. Do you need urgent assignment help ? Get in touch with us at eminencepapers.com.

Benefits of Forming Trade Blocks

There are many benefits of trade blocks to participating countries, including creating a broader market for companies from participating countries (Rowntree et al., 2017). The blocks eliminate protectionist policies, allowing companies from participating countries to take part in trade freely. The long-term effect is that these companies benefit from large economies of scale. For instance, NAFTA made it profitable for Mexican companies to manufacture goods in the US and then export the products to the rest of North America without tariffs (Rowntree et al., 2017). The free flow of products between countries also gives consumers access to a wide variety of products from different markets. Another benefit of trade blocks is that it increases access to capital, as companies take advantage of financially developed markets in specific countries.

Economic and Geo-Political Impact of Trade Blocks in Latin America

North American Free Trade Agreement (NAFTA)

According to Rowntree et al. (2017), NAFTA is a comprehensive economic and trade agreement that establishes a free trade area between the US, Mexico, and Canada. The trade agreement is structured into three separate bilateral agreements: one between the US and Mexico, another between the US and Canada, and finally, one between Canada and Mexico. NAFTA aims to achieve trade liberalization by reducing or eliminating trade barriers such as tariffs and Quotas between member states.

One of the immediate economic impacts of the NAFTA agreement is that it has spurred trade between member countries. Inter-regional agricultural trading has benefited most from the regional agreement. Before NAFTA’s implementation in 1993, agricultural products exchange (imports and exports) between NAFTA member states was $16.7 billion (Zahniser, 2015). By 2013, the agricultural products exchange had risen to $82.0 billion (Zahniser, 2015). This figure represents a 233% increase in agricultural trade within 20 years. Notably, Mexico established further free trade agreements under NAFTA, expanding its imports to these countries. For instance, the US and Canada only purchased 7.0% of Mexico’s agricultural products in 1993, but the figure rose to 13.6% by 2012, showing enhanced trading between NAFTA’s member states (Zahniser, 2015). These features show that trading blocs encourage member countries to seal trading imbalances. Countries that previously experienced negative trade imbalances get an opportunity to export more to members of a trading bloc.

Consistently, trade liberalization under NAFTA has facilitated the seasonal availability of fresh produce and broadened the variety of produce accessible at any given time. For instance, North American consumers can now access fresh tomatoes throughout the year thanks to the protected farm fields in every NAFTA member state (Zahniser, 2015). Mexico exports fresh avocados and grape tomatoes to the US. On the other hand, Mexican consumers enjoy a variety of non-citrus fruits from the US, including Apples, grapes, and pears (Zahniser, 2015). Mexico has since overtaken Canada as the largest foreign market for US apples and grapes. The fact that Mexico has overtaken Canada as the largest trading partner in the fruit market represents the geo-political benefit of trade blocs, in this case, facilitating access to foreign products.

The Southern Cone Common Market (Mercosur)

According to Tokman (1997), Mercosur is an economic and political union that is comprised of Brazil, Argentina, Uruguay, and Paraguay. Venezuela also used to be a member country, but they were suspended indefinitely in 2016. Mercosur’s primary objective revolves around creating a common market that generates investment and business opportunities through the competitive integration of national economies.

Among the major economic impacts of Mercosur is labour mobility among participating states. In the aftermath of Mercosur’s formation, a Multilateral Social Security Agreement of the Southern Common Market was adopted. The agreement advocates for foreign immigrants to enjoy similar rights as the host workers (Tokman, 1997). The agreement’s adoption led to a free flow of immigrants across South America, with Brazil and Argentina being the largest recipients of immigrant workers. To that end, Argentina receives most migrants from Latin America, with 35% from Paraguay and 15% from Uruguay (Tokman, 1997). Robust regional labour migration is a positive contribution to the economies of countries with high unemployment levels, in this case, Paraguay and Uruguay.

Besides, Mercosur has facilitated integrated skill training for young people across member states. Since most workers in the block work in the informal sector, there was relative difficulty initially in attempting to ensure market integration. However, most countries have since adopted integrated frameworks that recognize the heterogeneity of Latin American economies (Tokman, 1997). Brazil, Argentina, and Uruguay have adopted heterogeneous academic and training programs that recognize the uniformity of labour needs across Latin America (Tokman, 1997). These initiatives show how agreements made under trade blocks can encourage upskilling for labour mobility.

The Pacific Alliance

Another influential and relatively new trade block in Latin America is the Pacific Alliance, comprising Mexico, Peru, Colombia, and Chile. The trade bloc’s launch was in 2011, with the primary objective of advancing trade and integration (Durán Lima & Cracau, 2016). A notable economic advantage generated by the Pacific Alliance is the vast consumer base. The trade bloc has a population of 225 million people, making the Pacific Alliance the 8th largest and relatively young consumer force (Durán Lima & Cracau, 2016). The broad regional market also generates access to other consumer markets beyond Latin America, such as the EU.

The four countries under the block apply low tariffs and non-tariff barriers to boost trade. Each of the countries has signed free trade agreements, leading to the application of tariffs that are next to zero. Mexico and Chile apply tariffs between 1% and 2%, while in Colombia and Peru, the tariffs range between 3% and 4% (Durán Lima & Cracau, 2016). On average, Pacific Alliance member states receive 65% next to zero tariff preferences on their exports and 55% next to zero tariff preferences on their imports (Durán Lima & Cracau, 2016). The above features show that the block has reduced regional barriers to trade and contributed immensely to world trade.

Conclusion

In summary, NAFTA, Mercosur, and the Pacific Alliance are Latin America’s most influential trade blocs. Consistently,  trade blocs influence the economies and geo-political environments of member states based on the impact of Latin American trade blocs. First, their contribution toward reducing trade barriers spurs trade liberation and makes a significant injection to world trade. In addition, trade blocs facilitate regional labour mobility by triggering legislative frameworks toward uniformity. Trade blocs also enhance access to diverse seasonal agricultural products, thus shifting global geopolitics. The Latin American trade blocs have facilitated economic growth and shaped geopolitical trends so that member countries can benefit from international trade.

References

Durán Lima, J. E., & Cracau, D. (2016). The Pacific Alliance and its economic impact on regional trade and investment: Evaluation and perspectives.

Les Rowntree, Martin Lewis, Marie Prince, William Wyckoff. (2017). Globalization and diversity: Geography of a changing world. (Pearson).

Tokman, V. E. (1997). Labor issues in MERCOSUR. Common Market of the Sou the rn Co ne: MERCOS UR, 4(109), 1.

Zahniser, S., Angadjivand, S., Hertz, T., Kuberka, L., & Santos, A. (2015). NAFTA at 20: North America’s free trade area and its impact on agriculture. Washington, DC, USA: United        States Department of Agriculture, Economic Research Service.

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Compose a 3-4 page, double-spaced, typewritten document in 12 pt. font that examines the following questions:
NAFTA and Mercosur are established trade blocs in Latin America, whereas the Pacific Alliance is relatively new. What is a trade bloc, and what are the benefits of forming one? How have each of the three trade blocs in Latin America impacted the region’s economic growth and geopolitics? Include several specific examples, evidence, and statistics that support your claims.

In composing your report, use Google Scholar to identify any three websites as references that contain appropriate information, tables of data, graphs, etc. to construct your report. Include all three websites as references at the end of your document.
Be sure to include a summary/concluding paragraph.