Trading Blocs

Trading Blocs

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Exam Boards: Edexcel, AQA, WJEC, CIE, OCR         Level: AS/A LEVELS/IB/IAL

Trading Blocs

What are trading blocs?

Trading blocs are groups of countries that agree to reduce or eliminate trade barriers between themselves.

Examples of Trading Blocs

  • ASEAN – Association of Southeast Asian Nations
  • APEC – Asia Pacific Economic Cooperation
  • EU – European Union
  • NAFTA – North American Free Trade Agreement
  • CIS – Commonwealth of Independent States
  • COMESA – Common Market for Eastern and Southern Africa
  • SAARC – South Asian Association for Regional Cooperation

Types of Trading Blocs

1. Free Trade Areas

Trade barriers are removed between member countries. However, each member of the free trade area can impose trade restrictions on non-members. (NAFTA)

2. Customs Unions

There is free trade between member countries. However, every member of the customs union will have common external tariffs on goods and services on countries outside the union.

3. Common Markets

These have the same characteristics as customs unions but include the free movement of factors of production (e.g. Labour) between member countries.

4. Monetary Unions

These are customs unions which adopt a common currency e.g. Eurozone.

Costs of Trading Blocs

Trade diversion

This occurs due to trade being diverted away from a low cost and more efficient producer to a high cost and less efficient producer inside the bloc.

For example, the UK used to buy bananas from Ecuador or Brazil. However, after joining the EU it was now cheaper to buy from European countries than it was from Ecuador or Brazil. This is because countries outside of the European Union had high tariffs placed on their goods and services whereas countries within the trading bloc would have free trade or lower tariffs.

Comparative advantage 

Comparative advantage occurs when a country can produce a good at a lower opportunity cost than any competitor. However, due to the trade barriers against non-member countries, it’s likely to cause a decrease in specialisation and a decrease in the world output for that good or service.

Costs associated with a Monetary Union e.g. Eurozone

Transition costs 

These are one-off costs associated with the change in the currency of a country e.g. menus, coin and cash machines etc.

Loss of independent monetary policy 

Monetary policy is the manipulation of interest rates and money supply by the monetary policy committee. When a country joins a trading bloc, it will no longer have control of its independent monetary policy. The interest rates in the Eurozone are controlled by the European Central Bank (ECB).

Loss of exchange rate flexibility 

Members of the Eurozone no longer have their own currencies and therefore lose their exchange rate flexibility.

Benefits of Trading Blocs

Trade creation 

This is the removal of barriers between member countries. This will result in an increase in trade within the trading bloc. 

Increase in Foreign Direct Investment (FDI)

Large multinational corporations (MNC’s) would have unrestricted access to sell within the trading block.

Benefits of Monetary Unions

No transaction costs

The cost of changing currencies with importing and exporting will be eliminated.

Price transparency

Consumers will be able to compare prices immediately between countries.

Eliminate currency fluctuations

This could increase investment into the trading bloc.

 

Tushar Depala

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