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Regional Trading Blocs — Too Small To Matter?

How do regional trade agreements compare in terms of market size?

September 9, 2003

How do regional trade agreements compare in terms of market size?

Policy makers in poor countries, particularly former colonies, often balk at the idea of opening their markets to international trade and investment.

The Cold War may be over, but the rhetoric of imperialism and exploitation is alive and well. And, of course, there are real reasons still today to distrust the representatives of rich and powerful countries.

Neither private multinational companies nor the governments of industrialized countries that often help promote their interests can be relied on to give much consideration to the interests of citizens of the South and the transition economies.

Each country must vigilantly protect its own interests in international commercial interactions, even with allies.

In this wary spirit toward international capitalism, many countries' leaders have looked to regional trade associations as a compromise between the perils of navigating the open seas of global capitalism and remaining moored in their own little ports.

Self-sufficiency on a national level may be an unreasonable goal, but why not aim for regional economic autonomy? But do regional trade blocs offer a substantial advantage over a single economy? In most cases, the answer is no.

Even associations among large developing countries are remarkably small on a global scale. Regional trade groups can provide members some political and economic benefits, but they hardly offer a serious alternative to engagement with the global economy.

It should come as no surprise that most trading blocs are small — but how very small they are may come as a shock.

In fact, even Mercosur — the largest of the emerging market trade arrangements encompassing a population of 220 million — provides a market smaller than Italy's.

The chart below shows the size of nine of these regional trading arrangements, two among high-income countries (the EU and NAFTA) and seven other regional trade agreements.

The chart also illustrates the market size of three geographic units — South America, North Africa plus West Asia, and Sub-Saharan Africa. Each market is shown as a percent of the size of the U.S. economy.

For example, the EU market is about 10% larger than the United States. Five other high-income countries of various sizes are shown as well, ranging from Japan to Switzerland — a country with only seven million (prosperous) inhabitants.

Data source: World Bank. GDP in constant 1995 U.S. dollars. Population of each block/country/region in parentheses.
Copyright © 2003 by The Globalist.

In this array, it is striking how very small most of the trading blocks are.

Two of the blocs have markets smaller than Switzerland — the Andean Pact (which includes five South American countries, two of them members of OPEC) and the Southern African Development Community (SADC, 14 countries led by Africa's economic powerhouse, South Africa).

The seven Eastern European countries poised to join the EU (the Central European Free Trade Agreement, CEFTA) together constitute a market barely larger than Switzerland's.

For those in the middle, only South Asia (SAPTA) and South East Asia (AFTA or ASEAN) and southern South America (Mercosur) have markets larger than the Netherlands' economy with its 16 million people, and none is as large as Italy.

Among the geographic groupings, all of Sub-Saharan Africa is smaller than the Netherlands. All of Latin America – including Mexico, Brazil, Argentina and Chile — is smaller than Germany.

It is quite clear that entire developing continents are still smaller than a single big European economy, to say nothing of the EU.

With this fact in mind, regional self-sufficiency for Africa or Latin America is simply not a reasonable option.

For example, if Mercosur could do well as an inward-looking trading bloc — then Italy alone should too. But is anyone prepared to argue for Italian self-sufficiency?

While rich countries can rely upon their domestic economies or a few wealthy neighbors to reap the benefits of a large market, they still seek to expand external trade to increase domestic prosperity.

For the countries where most of the people of the world live — the developing and emerging market economies — there is simply no substitute for engagement with the world economy.

In this respect, Adam Smith would be pleased today to see that his observations about efficiency in a pin factory in 18th century Britain are still so relevant.

Trade Blocs

AFTA – Association of South East Asian Nations (ASEAN) Free Trade Area: Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam

Andean Pact: Bolivia, Colombia, Ecuador, Peru, Venezuela

CEFTA – Central European Free Trade Agreement: Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovak Republic, Slovenia

ECO – Economic Cooperation Organization: Afghanistan, Azerbaijan, Iran, Islamic Rep., Kazakhstan, Kyrgyz Republic, Pakistan, Tajikistan, Turkey, Turkmenistan, Uzbekistan

EU – European Union: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom

Mercosur: Argentina, Brazil, Paraguay, Uruguay

NAFTA- North American Free Trade Association: Canada, Mexico, United States

SADC – Southern African Development Community: Angola, Botswana, Congo (Dem. Rep.), Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, Zimbabwe

SAPTA – South Asian Association for Regional Cooperation Preferential Trading Arrangement: Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka

Regional Groupings

North Africa and West Asia: Algeria, Djibouti, Egypt, Arab Rep., Iran, Iraq, Jordan, Lebanon, Libya, Malta, Morocco, Oman, Syrian, Arab Republic, Tunisia, Turkey, West Bank and Gaza, Yemen, Rep., Saudi Arabia

Sub-Saharan Africa: Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, Comoros, Congo Dem. Rep., Congo Rep, Cote d’Ivoire, Equatorial Guinea, Eritrea, Ethiopia, Gabon, Gambia, The, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Mayotte, Mozambique, Namibia, Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, Somalia, South Africa, Sudan, Swaziland, Tanzania, Togo, Uganda, Zambia, Zimbabwe

Latin America: Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Guyana, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Uruguay, Venezuela