Regional Trading Block vs. Global Trading?

Question

Which one do you think benefits the countries more? Regional trading block or global trade?

And please state the reason. (( 10 points to best answer ))

Answer 1

Global trade.

Regional free trade agreements produce something called trade diversion, which does not happen in pure global trade.  Trade diversion is when a good can be produced more efficiently in one country, but the importing country imports it from a country where it is more expensive to produce, but it ends up being cheaper on the shelf because there are no tariffs on it.  Let's say that both Brazil and Mexico produce sugar, Brazil's sugar costs $5 to produce and Mexico's $6, and the tariff rate is 25%.  (All the numbers are completely made up to illustrate this point.)  If the US and Mexico are in a free trade agreement, then it will cost the consumer $6 (ignoring other costs) to buy Mexican sugar, but $6.125 (5*1.25) to buy Brazilian sugar.  Therefore, the consumers will buy Mexican sugar, so that's what the country will import.  The importing country actually ends up losing from trade diversion, since although the customers gain $.125 from cheaper goods, the government loses $1.50 in tariff revenue, so the country loses $1.125 overall.

Global trade does not have trade diversion, since all countries face the same tariff rate.