4.1.5 Trading blocs

What is a trading bloc?

A trading bloc is a group of countries that form an agreement to reduce or eliminate protectionist measures between each other

What is trade creation?

Trade creation means that businesses are able to enter new markets, which can lead to an increase in sales volume and sales revenue

What is The European Union (EU)?

• The EU is an economic union, originally formed in 1993

• Countries in Europe can apply to join the union, and, as of 2026, there are 27 countries in the union

• Being a member of the EU includes the free movement of goods and people between countries

• Countries within the union have no trade restrictions between themselves

• Countries within the union have common external barriers to countries outside of the union

What is the Association of Southeast Asian Nations (ASEAN)?

• ASEAN is a free trade area, originally formed in 1967, with 11 member countries

• A free trade area aims to achieve the free flow of goods in the region (eliminating trade barriers)

• Free trade areas lower business costs, increase market size and help businesses generate economies of scale

• The ASEAN free trade areas lower business is less integrated that the EU - it does not allow for the free movement of people between the countries, whereas the EU does

What is USMCA (United States, Mexico and Canada)?

• USMCA is the trade bloc that superseded NAFTA, which was established in 1994 between Canada, Mexico and the USA

• The aim was to promote free trade between these countries

What were the effects of USMCA?

• Many USA businesses relocated their manufacturing to Mexico

• Goods could be produced there more cost-effectively due to the lower wages paid to Mexican workers

• The products could then be imported back into the USA without any tariffs being incurred

• Mexico had benefitted, as it has helped to create many new industries and jobs within the country

What is the benefits for businesses inside a trading bloc?

• Access to more markets - sell to more customers due to free movement of goods

• External tariff walls - a tax applied to imported goods by a group of countries that have formed a trade agreement, this protects businesses within the trading blocs from competition from businesses outside oil the trading bloc

• Infrastructure support - businesses may gain additional support from the government to enable them to maintain their competitiveness against businesses ion countries within the trading bloc

• Free movement of labour - businesses may gain c an source workers from a wider poor, higher supply of labour may push wages lower, leading to reduced costs for businesses

What are the drawbacks for businesses inside a trading bloc?

• Increased competition - may be an issue for small businesses as they have fewer resources available with which to compete, businesses with monopoly power can increase their monopoly by eliminating competitors in other countries within the bloc

• Common rules and regulations - in order to operate as one market, new rules and regulations may be put in place that a business must adhere to

• Retaliation - external tariffs set against countries outside of the trading blocs may lead to retaliation from these countries

• Inefficiency - there is less competition from businesses in countries outside of the bloc which may reduce the incentive of businesses to be more efficient