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Trading blocs


A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non-members. Trading blocs are a form of economic integration, and increasingly shape the pattern of world trade. There are several types of trading bloc:

Preferential Trade Area

Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. This is often the first small step towards the creation of a trading bloc.

Free Trade Area

Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members.

Customs Union

A customs union involves the removal of tariff barriers between members, plus the acceptance of a common (unified) external tariff against non-members. This means that members may negotiate as a single bloc with 3rd parties, such as with other trading blocs, or with the WTO.

Common Market

A ‘common market’ is the first significant step towards full economic integration, and occurs when member countries trade freely in all economic resources – not just tangible goods. This means that all barriers to trade in goods, services, capital, and labour are removed. In addition, as well as removing tariffs, non-tariff barriers are also reduced and eliminated. For a common market to be successful there must also be a significant level of harmonisation of micro-economic policies, and common rules regarding monopoly power and other anti-competitive practices. There may also be common policies affecting key industries, such as the Common Agricultural Policy (CAP) and Common Fisheries Policy (CFP) of the European Single Market (ESM).

The European Union (EU)

The EU is the world’s largest trading bloc, and second largest economy, after the USA.

The EU was originally called the Economic Community (Common Market, or The Six) after its formation following the Treaty of Rome in 1957. The original six members were Germany, France, Italy, Belgium, Netherlands, and Luxembourg.

The initial aim was to create a single market for goods, services, capital, and labour by eliminating barriers to trade and promoting free trade between members.

In terms of dealing with non-members, common tariff barriers were erected against cheap imports, such as those from Japan, whose goods prices were artificially low because of the undervalued yen.

By 2014, following continuous enlargement, the EU had 28 members. Croatia is the latest country to join, in July 2013.

Austria

Germany

Norway

Belgium

Greece

Poland

Bulgaria

Ireland

Portugal

Cyprus

Italy

Romania

Croatia

Latvia

Spain

Czech Republic

Lithuania

Slovenia

Denmark

Luxembourg

Slovakia

Estonia

Malta

Sweden

Finland

Netherlands

UK

France

 

The main advantages for members of trading blocs

Free trade within the bloc

Knowing that they have free access to each other's markets, members are encouraged to specialise. This means that, at the regional level, there is a wider application of the principle of comparative advantage.

Market access and trade creation

Easier access to each other’s markets means that trade between members is likely to increase. Trade creation exists when free trade enables high cost domestic producers to be replaced by lower cost, and more efficient imports. Because low cost imports lead to lower priced imports, there is a 'consumption effect', with increased demand resulting from lower prices.

See: Trade creation and trade diversion

Economies of scale

Producers can benefit from the application of scale economies, which will lead to lower costs and lower prices for consumers.

Jobs

Jobs may be created as a consequence of increased trade between member economies.

Protection

Firms inside the bloc are protected from cheaper imports from outside, such as the protection of the EU shoe industry from cheap imports from China and Vietnam.

The main disadvantages of trading blocs

Loss of benefits

The benefits of free trade between countries in different blocs is lost.

Distortion of trade

Trading blocs are likely to distort world trade, and reduce the beneficial effects of specialisation and the exploitation of comparative advantage.

Inefficiencies and trade diversion

Inefficient producers within the bloc can be protected from more efficient ones outside the bloc. For example, inefficient European farmers may be protected from low-cost imports from developing countries. Trade diversion arises when trade is diverted away from efficient producers who are based outside the trading area.

See: Trade creation and trade diversion.

See: EU Sugar Case

Retaliation

The development of one regional trading bloc is likely to stimulate the development of others. This can lead to trade disputes, such as those between the EU and NAFTA, including the recent Boeing (US)/Airbus (EU) dispute. The EU and US have a long history of trade disputes, including the dispute over US steel tariffs, which were declared illegal by the WTO in 2005. In addition, there are the so-called beef wars with the US applying £60m tariffs on EU beef in response to the EU’s ban on US beef treated with hormones; and complaints to the WTO of each other’s generous agricultural support.

During the 1970s many former UK colonies formed their own trading blocs in reaction to the UK joining the European common market.