4.1.5 trading bloc

trading blocs

• when the governments of a group of countries agree to trade together freely

• trade liberalisation

types of trading blocs

• Preferential trade areas

• Free trade areas

• Customs unions

• Common markets

• Economic unions

preferential trade areas

group of countries that reduce tariffs and trade barriers for certain products between each other

free trade areas

a group of countries that remove most or all of tariffs and quotas on trade between them but keep there on external trade policies

customs unions

a group of countries with free internal trade plus a shared common external tariff and joint trade policy

common markets

a customs union that also allows free movement of goods, services, capital and labour access member states

economic unions

a common market that integrates economic policies often including shared regulations, taxation rules and sometimes a common currency

advantages of trading blocs

• trade creation

  • trade encouraged to more countries

• competition

  • drives production and dynamic efficiency

• access to markets

  • offers a significant scope for businesses to expand

• freedom of movement (EU ONLY)

  • right to live and work anywhere there without restriction which boosts labour mobility

disadvantages of trading blocs

• trade diversion

  • goods within may be more expensive and so damage consumer welfare

• monopolies

  • tariffs have seen significant merger activity and the creation of large monopolies seeking to exploit available economies of scale

• unemployment

  • work is mainly set jobs as production is transferred to member states with lower labour costs

• cost

positive impacts on businesses of trading blocs

negative impacts on businesses of trading blocs

EU

how it functions

success & failure

operates as both a customs union and a single market, meaning no internal trade barriers, a common external tariff, and free movement of goods, services, capital, and labour trade negotiations are conducted centrally on behalf of all member states has expanded from 6 to 28 members (before Brexit), with multiple candidate countries

✓ largest customs union in the world with ~15.5% of global trade ✓enlargement created a larger free-trade area with more potential economies of scale ✓increased competition has lowered prices and improved choice and quality for consumers ✓businesses can benefit from lower-wage economies within new accession countries ✘Migration concerns, particularly around whether richer members can absorb inflows from lower-wage countries ✘new entrants often require financial and structural support funded by stronger economies ✘enlargement increases bureaucracy and administrative costs ✘political tensions, including events like Brexit

ASEAN

how it functions

success & failure

a regional organisation of 10 Southeast Asian countries promoting economic cooperation and trade integration not a full single market; integration is gradual with varying levels of development coordinates industrial production and exports, especially manufactured goods bound for Western markets

✓ one of the fastest-growing regions globally, with GDP growth above 5% (2000–2013) ✓ combined population of ~600 million—larger than both the EU and North America ✓ would rank as the world’s fourth-largest economy if it were a single country ✓ strong manufacturing base and rising economic power, increasingly able to compete with NAFTA and the EU ✘ huge differences in GDP per capita (e.g., Singapore vs. Laos/Myanmar) make integration uneven ✘ cultural and economic diversity complicates harmonisation of policies ✘ not yet a true single market; barriers still exist in labour movement, regulations, and capital

NAFTA

how it functions

success & failure

a free-trade area (USA, Canada, Mexico) eliminating most internal trade barriers while each country maintains its own external trade policy encourages cross-border investment and production sharing, particularly between the USA and Mexico

✓ led to major FDI inflows into Mexico, especially from U.S. firms ✓ Boosted economic growth across the region since its introduction in 1994 ✓ enabled supply chains to integrate across all three countries ✘ transfer of production from the USA to Mexico caused job losses and tension among American workers ✘ benefits were uneven—Mexico gained on manufacturing jobs, while U.S. industrial regions weakened ✘ does not allow free movement of labour or a common external tariff, limiting deeper integration