Trading blocs

Trading bloc

When countries come together to form a bloc of countries who all agree to remove trade barriers

Types of trading blocs

• Free trade areas

• Customs unions

• Common markets

• Monetary unions

Free trade area

Where a bloc of countries agree to remove all trade barriers between each other but each country is still free to set their own trade barriers on non-member countries

Customs union

Removes all trade barriers between member countries and a common external tariff on non-member countries.

Common external tariffs

Tariffs that customs union members must uphold within the customs union and non-member countries

Common markets

• Members remove all trade barriers between each other

• Required to adopt common external tariffs

• Factors of production can move freely between these countries

Monetary Unions

• Members remove all trade barriers between themselves

• Adopt common external tariffs

• Share a common currency

• Shared central bank

• Shared monetary policy

Effects of trading blocs on trade

• Creates additional trade

  • Removing trade barriers = increased trade due to decreased price of imports within the trading bloc

  • EVAL: Can divert trade away from non-members

    • Common external tariffs increase the price if imports from non-member countries

Trade creation (+tive trading blocs)

Removing the tariff can lead to higher consumer surplus due to reduced prices (can be showed using the tariff diagram)

Consumer surplus gain from increased quantity of goods/choice so better quality of living

Trade diversion (-tive trading blocs)

• When trade is diverted from low cost producers to high cost producers

  • joining trade blocs may result in a country having to forgo the importation of cheaper goods from low cost producers (due to common external tariffs) to higher cost producers within the trade bloc

• Therefore trade was diverted away from this country

  • Producers lose out on trade outside the bloc - leads to decreased revenue and the downward multiplier effect (eg: loss of profits and increased unemployment)

• (+tive) Allows for members to increase their sales + increase growth within their industry

Accelerator effect

Changes in investment can be directly linked to changes in the rate of GDP growth

Multiplier effect

when an initial injection of spending leads to a larger increase in total national income than the initial amount spent