Countries join economic blocs for several reasons. First of all, it increases foreign direct investment in the country by eliminating or at least significantly reducing trade barriers. Another benefit of an economic bloc is that it allows companies to achieve economies of scale because it expands the market for their goods and services and sometimes the increase in market size is quite huge as is the case with European Union. Since economic blocs reduce barriers, they also improve competition and, thus, force companies to become more efficient. This, in turn, helps the consumers through higher quality products, greater variety, and lower prices. Prices of products and services do not come down only due to greater efficiency and economies of scale but also due to removal of artificial trade barriers such as tariffs.
As far as the U.S. is concerned, the main economic bloc to which it belongs is NAFTA. NAFTA or North American Free Trade Agreement is an economic bloc consisting of the U.S., Canada, and Mexico. Even though NAFTA entered into force on January 1, 1994, certain duties and restrictions remained until 2007. This economic bloc now covers 450 million people as well as total economic activity of about $17 trillion .
From my perspectives, NAFTA has helped Americans enjoy low cost of living because many American companies produce goods and services in Mexico where labor costs are lower. Another benefit of NAFTA has been an improvement in U.S. trade balance. The potential consequences of NAFTA have been little higher unemployment rate due to some jobs moving to Mexico. Another potential consequence of NAFTA might have been huge costs for smaller U.S. companies and certain industries. Smaller companies have fewer resources, thus, greater competition makes things difficult for them, especially those in early stages of their creation. Similarly, some industries like agriculture suffer because they cannot enjoy low production costs, specifically labors costs that industries in Mexico have.
- Office of the United States Trade Representative. (n.d.). North American Free Trade Agreement (NAFTA). Retrieved March 1, 2014, from http://www.ustr.gov
