3.2B National Government Policies Promoting Trade Blocs and Economic Liberalisation  

National governments are key players in promoting free trade blocs (P: role of European Union, ASEAN) and through policies (free market liberalisation, privatisation, encouraging business start-ups) (P: role of governments in economic liberalisation)

How can National Governments Accelerate Globalisation?

1) By Joining/Promoting Free Trade Blocs

• A free trade bloc is an agreement between a group of countries to remove all barriers to trade, e.g. import/export taxes, tariffs and quotas.  

Trade blocs lead to globalisation through:

1. Specialisation
   1. Countries specialise in goods being produced which have a comparative advantage (e.g. can produce at the lowest cost) and trade these products for other members' specialisms.
   2. Firms producing a country's specialisation become TNCs as they sell outputs through the bloc.

The European Union:

• A single market trade bloc composed of 28 members and a population of 512 million.
• It guarantees the free movement of goods, capital and people.
• The Schengen area countries (26) have removed barrier controls.
• A single currency, the euro, has been adopted by 19 members.
• Uniform product labour and environment regulations.
• Integrated economic policy areas, e.g. Common Agricultural Policy, Structural Funds to assist regions within member countries with a GDP per capita of less than 75% the EU average.
• The founding Treaty of Rome in 1957 committed members to work towards an 'ever closer union'
• Political globalisation with the European Parliament and some foreign policy determined at EU level
• The original political aim was to integrate economies, so that interdependence prevents war.

ASEAN (The Association of South East Asian Nations)

• A free trade area with 10 members with a population of 625 million
• A uniform low tariff is applied between members for specified goods. It's working towards the elimination of tariffs sector by sector.
• Agreed to create a single market by 2015, however this was not achieved.
• Political globalisation: ASEAN aims to co-ordinate response to regional political issues. It's more political than economic.
• ASEAN pledged to remain nuclear weapons free in 1995.
• 'ASEAN way incorporates a culture specific approach to conflict resolution. Seeks consensus and avoids public criticism of member nations.
• e.g. ASEAN members won't comment on Burma's internal policies

2) Free market liberalisation

• This involves promoting free markets and reduces government intervention in the economy
• Competition between firms leads to innovation and lowest cost production
• Outcome is higher output, lower prices and greater choice - higher SOL
• It was initially promoted in the 1980's by UK Prime Minister Margaret Thatcher and US President Ronald Reagan.
• It means ending the monopoly provision of some services like telephones, broadband, gas and electricity, so you can choose your supplier based on quality and price.
• It has created competition in once restricted markets.
• It involves removing price controls, breaking up monopolies (e.g. trade union monopolies of labour supply) and encouraging competition - including foreign competition, which increases efficiency further and promotes globalisation.
• Foreign competition can be encouraged by removing legal restrictions on foreign ownership  and removing capital controls, allowing inflows of FDI (and outflows)

3) Privatisation

• Since the 1980s many governments have sold of industries they once owned (so-called 'nationalised industries)
• In the UK the steel, car, electricity, gas and water industries were all state-owned but are now privately owned
• However, many governments still own big slices of industry, even in big countries like France.
• It may increase efficiency as the profit motive minimises loss (government reluctant to sack workers, leading to higher labour costs)
• Permitting foreign ownership allows an injection of foreign capital through FDI, introduces new technologies and promotes globalisation.

4) Encouraging Business Start-Ups

• Grants and loans are often made to new businesses especially in areas that are seen to be globally important growth areas such as ICT development, pharmaceuticals or renewable energy.
• There could also be low business taxes, well-enforced contract laws, minimum regulation and efficiency bankruptcy procedures, which encourage new firm creation.
• It creates innovation and competition in new production techniques, erodes excess profit of monopolies, lowers prices and increases household PP.
• Where legal restrictions on foreign ownership and capital controls are also removed, foreign new businesses will be attracted to start up, promoting globalisation.
• e.g. The UK Government's support for ICT start-ups in Tech City (Silicon Roundabout) in the Old Street area of London. 

Other Information

 

• A trade bloc (not free trade) is a group of countries that agree to reduce trade barriers between them. They promote free trade between members, increasing economic globalisation.
• This ranges from a free trade area where tariff barriers are removed between members (but a common external tariff is adopted) to a single market, where all tariff and non-tariff barriers are removed, and there is a common external tariff and free movement of people. There are all non-tariff barriers (e.g. limiting number of Japanese cars imported); the euro prevents changing currency rates affecting deals.
  

Problems with trade blocs:

• Trade distortion
  
  • Imposition of common external tariff makes goods from non-members expensive. Trade distorted as the switch from cheaper non-member producer to more expensive member producer. Prices rise and SOL falls.
    
• Short term unemployment
  
  • Specialisation shifts resources to industries which have a comparative advantage.
    
  • Firms being specialised away from will shut down. Workers' employment lost (though there are new jobs in the expanding specialised industry and in new demand areas from increases purchasing power)
    
  • new jobs likely to benefit new workers and older ones less likely to retrain
    
• Cultural erosion
  
  • cheap uniform products across the bloc replace more expensive local variants.
    
• Sovereignty loss 
  
  • nation gives up determination of some areas of economic (and in single market, immigration) policy