Trading Blocs

What is trade creation?

Trade creation occurs when a country consumes more imports from a low-cost producer and fewer from a high-cost producer, typically due to reduced trade barriers within a trading bloc.

What is trade diversion?

Trade diversion happens when a country shifts trade from a more efficient, lower-cost producer outside a trading bloc to a less efficient, higher-cost producer inside the bloc, due to protectionist barriers on non-members.

How has the UK’s trade been affected by trading blocs?

The UK trades mainly with the EU within the bloc, leading to a reduction in trade with former Commonwealth nations.

What is a free trade area?

A free trade area is where countries agree to trade goods without protectionist barriers. Examples include NAFTA and EFTA, allowing members to exploit their comparative advantages and increase efficiency.

What is a customs union?

A customs union is a group of countries that have a common trade policy, such as a shared external tariff, and free trade between members. The European Union is an example of a customs union. (however, no free movement of labour or capital)

What is a common market?

A common market allows free trade in goods and services, a common external tariff, and free movement of capital and labour across borders. The EU was originally established as a common market, where EU citizens can work in any member country.

How do trading blocs reduce transaction costs for firms?

Trading blocs eliminate trade barriers and border controls, making it cheaper and simpler for firms to trade.

How do trading blocs help firms exploit economies of scale?

Firms can access a larger market (e.g., the EU with 500 million people), allowing them to specialise, exploit comparative advantages, and benefit from efficiency gains and advanced technology.

What effect does membership in a trading bloc have on competition?

Firms face more competition, which drives efficiency and better resource allocation. There may also be long-term benefits of dynamic efficiency, although these may not be evenly spread across all members.

How does migration impact firms in a Customs Union?

Migration increases the supply of labour, helping fill labour shortages, but it may also result in some countries losing their best workers.

How does membership in a trading bloc create interdependence?

Trading blocs increase dependency on the performance of member economies, meaning the economic decisions or issues in one member state can affect others.

What are the risks of growing interdependence in trading blocs?

It increases vulnerability to external shocks, as economic downturns or crises in one country can spread to others. An example of this is the global spread of the 2008-2009 financial crisis.