Q: CURT: “WHY DO FEDERATIONS BENEFIT FROM FORMING A TRADE BLOCK?”
1) Nash Equilibrium: Small countries have no negotiating power in trade. However, an alliance of such countries can negotiate as a block and obtain preferential treatment in negotiation. It’s beneficial to all parties because negotiating itself is costly. The same is true for defense and insurance, or anything where all parties have an interest. It’s the same for business. Would you rather sell easily and a lot to Walmart or to 10,000 independent stores? If you can lock Walmart into a contract then you can plan on an increasingly long time horizon, which reduces risk. Conversely, as in China, where you are ‘concentrated’ in a single market (USA) you are somewhat bound in external actions because of your dependence on that market.
2) Ending internal frictions of negotiation between parties. It is very painful and expensive to have transport of goods especially, and services somewhat across multiple borders. Open markets within a federation radically discount the friction of trade, just as the distribution of property rights from the village(tribe), to the family, to the individuals in the family eliminated the opportunity for corruption, and increased the velocity of cooperation and trade.
MEANING:
Alliance on a) defense, b) external and internal trade, and c) internal insurance against such things as disasters, and in rare cases d) a central bank of currency issuance and exchange, distributes the cost of something that benefits from scale while federation of states allows custom production of commons that do not benefit from scale, and instead, generate FRICTION AND CONFLICT because they do NOT scale.
-Curt Doolittle