Trade Blocs
Essay Writing - IGCSE Example 1
Case Study: The ASEAN is a trade bloc. It started its operation in 1967 by five countries Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Later it was joined by some more countries like Brunei, Laos, Vietnam, Myanmar, and Cambodia and became a 10-member trading bloc in 2016.
ASEAN covers a market with 634 million of the population in 2016 compared to 185 million in 1967. Trade has grown from $9.7bn in 1967 to $2.2 trillion in 2016. Per capita income has grown from $122 in 1967 to $4021 in 2016. (source – www.fwd.news)
Considering the information above assess the benefits for a country, such as Brunei, of being a trade bloc member.
Well! Brunei being a member of a trade bloc like ASEAN may have many advantages but not without the disadvantages.
Anyway, before I get into the assessment of the benefits of Brunei as a member of ASEAN, let me first take note of the Trade Bloc. Trade blocs are associations of groups of countries within specific regions that manage and promote trade activities among the member countries. With committed members, Trade blocs may result in more free trade by lowering or abolishing tariffs and quotas between member countries leading to benefit each other.
The same applies to Brunei as firms from the country might be allowed to enter the member countries' markets without many hurdles. This means Brunei`s firms can get access to wider markets to sell their goods and services without facing any trade barriers such as tariffs and quotas.
If goods from Brunei are accepted and liked by consumers in the member countries like Vietnam or Malaysia then firms in Brunei may expand their capacity as they now have wider markets to cater to. This will result in Brunei`s firms experiencing further benefits of economies of scale leading to lower average costs than before.
Trade Blocs
It is also likely that Brunei`s firms may focus on the production of specific goods to export to the member countries leading to being specialized in the field. In a nutshell, Brunei`s firms will enjoy competitive advantages due to lower costs and greater acceptance by the larger number of consumers across the region.
Benefits may not only be limited to firms rather they could be spread among consumers and the economy.
As trading blocs promote free trade which means now there will have foreign sellers in Brunei leading to greater supply and lower prices. As buyers consider their self-interest first so they may find it an ideal condition for making purchases as there would be lower prices with the higher supply by the domestic and foreign sellers altogether. At the same time, they enjoy the number of choices available in the market due to an increase in the number of sellers. As a result, the welfare of consumers will increase in Brunei.
Trade Blocs
As an economy, Brunei would benefit further as it may attract FDI which will be helpful to increase its productive potential further leading to further growth in the long run. This can be seen as evidence in the case study where it mentions the increase in per capita GDP from $122 in 1967 to $4021 in 2016. This could be the effect of long-run economic growth due to an increase in productive potential since 1967.
However, there may have some adverse effects of joining the trading bloc such as increased competition for domestic firms, dependency on foreign trade, less freedom to trade with non-member countries, and the damaging effect on domestic firms.
Brunei being a member of ASEAN domestic firms will face huge competition as imports from other member countries will increase leading to unwanted price decreases due to a larger quantity of supply making the domestic firms experience shrinking profits.
As firms in Brunei enjoy a greater market so their growth vis-a-vis the economic growth of Brunei will depend on the economy of member countries. If member countries suffer from bad economies then it will reflect on the firms` revenue vis-a-vis Brunei`s economy.
As economies in the trading blocs are interdependent, any supply shock in a country will affect the consumption in the other member countries. The same applies to Brunei too. This means consumers in Brunei will suffer due to not being able to maintain their normal consumption vis-a-vis living standards if imports are stopped due to any supply shocks in the exporting countries. Besides, dependency on imported goods may cause higher inflation if foreign sellers increase their prices.
Trade Blocs
Regarding the domestic industries particularly the infant industries, I must say that the firms in Brunei could be in an odd position if they are not competitive enough to compete with efficient foreign sellers. The biggest damage would be to the infant industries as they might not at all be able to compete with the matured industries from other member countries leading to wipe-out from the market.
One more adverse effect of being a member country is less freedom to trade with non-member countries as Brunei may rely heavily on trading with member countries than non-members. This means the trading in the bloc will come at the cost of global trade.
Overall, the benefits and the costs of joining the trading bloc will depend on how successfully Brunei`s firms are competing within the region with sellers from other member countries and the trade with non-member countries. For example; if the majority part of the trade occurs within the bloc and an ignorable part with the non-members then it would be considered that the benefits of joining the trade bloc are greater than not joining.
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