Understanding Trading Blocs in Supply Chain Management and Logistics:
Supply chain management has become increasingly fragmented and more complex. There are numerous challenges facing supply chain managers today, including shrinking market windows, inventory carrying costs, and supplier fragmentation. These factors make it difficult to manage supply chains effectively. In response to these challenges, countries (and even companies) have begun splitting their supply chains into smaller segments called trading blocs. A trading bloc is a preferential trade agreement between a group of countries designed to reduce or remove trade barriers between its members. According to Edward D. Mansfield and Helen V. Milner in their book The Political Economy of Regionalism, there are different types of trading blocs in supply chain management and logistics, including:
- Free trade areas or zones.
- Preferential trade agreements (allow their member countries to have preferential access to certain products from other member countries).
- Customs unions (made up of free trade area with common external staff).
- Common markets (made up of free trade area in which physical, technical, and fiscal barriers are reduced as much as possible).
- Economic unions (made up of common market and customs union as described above).
- Customs and monetary unions (made up of customs and currency unions; share the same external trade policy and currency).
- Economic and monetary unions (made up of common market, customs union, and monetary union).
In these instances, “union” refers to a group of two or more countries that form a unit that shares the same philosophies on certain aspects of trade. (This is not be confused with an employee collective bargaining group).
Types of Trading Blocs in the World:
Countries can belong to a variety of different trading blocs, and the World Trade Organization tracks the status of proposed blocs. There are also regional trading blocs that form when nations within a particular region join together to reap the benefits. Some of the larger regional trading blocs include the North American Free Trade Agreement (NAFTA), the European Free Trade Association (EFTA), the Caribbean Community (CARICOM), the African Union (AU), the Union of South American Nations (UNASUR), the Eurasian Economic Community (EurAsEC), the Arab League (AL), the Association of Southeast Asian Nations (ASEAN), the Central European Free Trade Agreement (CEFTA), and the Pacific Islands Forum (PIF).
North American Free Trade Agreement (NAFTA):
The North American Free Trade Agreement of 1994 aims to create a unified free trade zone comprising Canada, the United States, and Mexico by eventually eliminating all barriers to trade such as tariffs and other protective measures.
Under NAFTA, a large number of tariffs were dropped immediately and the rest scheduled for gradual elimination. However, some documentation requirements remain to challenge exporters and importers in the region—along with perhaps deeper problems arising from cultural and political differences, the movement of labor and companies across borders, and inadequate infrastructure in Mexico.
To provide a sense of how tricky this can be, here are the four provisions for determining which goods qualify for preferred treatment:
- Goods wholly obtained or produced in the NAFTA region.
- Goods produced in the NAFTA region wholly from materials originating in the region.
- Goods meeting the origin rule.
- Unassembled goods and goods classified with their parts that do not meet the Annex 401 rule of origin but contain 60 percent regional value content using the transaction method or 50 percent regional value using the net cost method.
The immediate benefit of NAFTA to importers who bear responsibility for paying import duties was to eliminate tariffs on a number of items and schedule the rest for phaseout over the subsequent five, ten, or 15 years. Some benefits envisioned for a free trade zone in North American have been partly realized by the lowering of tariff barriers but there is room for improvement.
A side effect of NAFTA has been the growth of the companies called “maquiladora”—facilities for manufacturing or assembly of duty-free components. Many are located in northern Mexico, and while the maquiladora operations did not come into being with NAFTA, they have thrived since the inception of the agreement, becoming steadily more integral to the supply chains and internatioinal supply chain management crossing the border between the United States and Mexico.
While the freer access to markets and labor among the three countries provides benefits to manufacturers, other conditions in the area can be drawbacks, such as:
- The lack of adequate infrastructure in Mexico.
- Complex paperwork related to country of origin of exported items.
- Ongoing problems with restrictions on trucking both coming into and going out of Mexico, among the countries occasioned by plant closings and job losses.
Effects of Trading Blocs on Supply Chains:
In order to have the complete picture of trading blocs in supply chain management, the effects on supply chains within the bloc and outside the bloc should be explained. According to the gravity model, countries that are geographically closer tend to have a high volume of trade. The gravity model is used by social scientists to predict the movement of people and ideas between two population centers as a function of the population of each area and the distance between the areas.
The transportation costs and trade barriers tend to be lower, countries that are closer, to one another are more likely to become trading partners by forming a trading bloc. Those chains in the respective member countries usually reap the benefits of volume, quantity, and better prices and terms as well as lower levels of tariffs.
With membership in a bloc, often supply chain management will find that it’s easier and less complicated negotiating with fewer partners. With this smaller number, concessions between members can be more easily made and easily enforced, making the process less headache-ridden. Supply chains from lesser-developed member countries with more economic and political variability can take advantage of agreements with larger entities that they would otherwise not have access to.
Effects outside the Trading Blocs in Supply Chain Management:
If a trading bloc in supply chain management is large, nonmembers may see their prices and demand for exports decrease. This can result in deterioration in trade terms and decreased market power of these nonmembers. Seeing a decrease in their exports, they may resort to protectionist tactics and increase their lobbying efforts.
The effects of trade diverted from nonmembers’ chains can impact the nonmembers’ ability to make multi-country negotiations feasible and increase the difficulty of doing business across borders, even if it’s with the country right next door or one with which they’ve previously traded. Sometime if they are fortunate enough to continue to trade, the nonmembers may be forced to pay optimal tariffs to the bloc members.
Impact of Trading Bloc in Supply Chain Management and Logistics:
Trading blocs provide countries with a cost-effective way to move goods and raw materials from one country to another. This is largely due to the fact that blocs make it easier to share resources, such as shipping lines, planes, and trucks. Blocs also allow countries to avoid the costs traditionally associated with customs and documentation. By using blocs, countries can avoid the additional costs associated with inter-company shipping, such as documentation, customs, taxes, and tariffs. Blocs can reduce lead times, particularly in situations where the origin and destination of shipments are within the bloc. Bloc members can also benefit from a reduction in inventory carrying costs. This is due to the fact that members can more closely synchronize production with demand.
Trading blocks – Material Handling and Logistics:
Cargo handling is a key activity that is at the heart of trading bloc operations. For example, a group of retailers might decide to handle their entire merchandise distribution in-house, while a group of manufacturers might choose to handle only the distribution of their raw materials. Blocs may also include countries that specialize in distributing products via air or sea freight. These countries/companies provide a wide range of services, including order booking, tracking, documentation, and customs clearance. One may learn these skills by studying the recognized transport and logistics training courses.
Implications of Trade Agreements on Strategic Decisions:
A key strategic decision that countries must consider when forming trading blocs is whether to join existing blocs or form new ones. countries must evaluate the strengths and weaknesses of existing blocs, and determine if it would be more advantageous to join an existing bloc or to form a new one. Blocs that are new or have been recently formed tend to be more open to new members, whereas blocs that are mature are often highly selective in their membership. Blocs can be beneficial to countries/companies in a variety of industries and sectors. For example, a trading bloc between pharmaceutical companies may help members reduce the cost of clinical trials by sharing testing facilities, or a bloc between retailers may help members reduce costs associated with sourcing merchandise.
Trade Regionalization: Is the Hype More Than Reality?
There is a growing trend towards regionalization in global supply chains, which some refer to as “trade regionalization.” Some commentators and industry experts predict that trade regionalization will have a significant impact on global supply chains in the coming years. However, research shows that trade regionalization is more hype than reality. Trade regionalization refers to the emergence of clusters of countries that supply and purchase goods and services within a single region. Blocs are often the foundation of trade regionalization.
Supply chain management has become increasingly complex and interconnected, resulting in fragmentation and difficulty in managing operations. To combat this, countries/companies have begun to split their supply chains into smaller segments called trading blocs. A trading bloc is a group of companies that work together to share production and logistics services in order to reduce costs and streamline operations. Trading blocs provide countries/companies with a cost-effective way to move goods and raw materials from one country to another, and can reduce lead times, particularly in situations where the origin and destination of shipments are within the bloc. Blocs can also benefit from a reduction in inventory carrying costs, as members can more closely synchronize production with demand. Blocs provide countries with a cost-effective way to move goods and raw materials from one country to another, and can help members reduce the costs associated with customs and documentation by using blocs, countries/companies can avoid the additional costs associated with inter-company shipping, such as documentation, customs, taxes, and tariffs.
In summary, the optimal presence of trading blocs depends on the level of potential positive effects of creating trade as well as the potential negative effects of diverting trade and creating adverse changes in trade terms for non-members.