4.1.5 Trading blocs

• The EU

  27 countries

  450 million citizens

  GDP $19 trillion

  GDP per capita $42,000

  HDI very high 0.87

  complete free trade and movement of people (political and economic union)

  single market and monetary union
• NAFTA

  3 countries

  481 million citizens

  GDP $22.5 trillion

  GDP per capita $46,800

  HDI – very high 86.8

  Free trade area only
• ASEAN

  16 countries

  3.4 billion citizens (1/2 world’s

  population)

  GDP $49.5 trillion (39% of world

  trade)

  GDP per capita $12,300

  HDI – medium

  India/China account for most of the population & GDP

  Free trade area only between original members and a reduction

  in tariffs working towards free trade with all members – Trading

  Bloc
• Types of Trading Bloc

  
  

  Common market – an area where goods capital and labour are free to move without restriction.

  
  

  Tariff free trade.

  Customs Union - is where all barriers are removed and members adopt a set of protectionist barriers against non-member states.

  
  

  Economic and Monetary Union – where the countries have a single market and currency.
• Types of trading bloc

  
  

  Free Trade Area – where there is complete free trade, but they have different trade barriers against non-members.

  
  

  Single market – a market where all barriers have been removed and have common laws governing trade.

  
  

  Trading bloc – a group of countries that have signed a regional trade deal to reduce or eliminate tariffs, quotas and protectionist measures.
• Advantages to a business of being within a trading bloc (free trade area)

  Tariff free (and free from other protectionist measures such as quotas) – reducing costs, allowing a business to be more competitive.

  Larger market access – greater sales/profits

  Less bureaucracy (rules,regulations and paperwork) when trading internationally

  Cheaper to import stock or raw materials

  One product standard – allows a business to reap economies of scale
• Disdvantages to a business of being within a trading bloc (free trade area)

  Greater competition

  It may be difficult for small domestic firms to compete with larger overseas competition

  Some countries may allow business tp produce with lower ethical or environmental standards
• The single European market

  problem:different countries had different product standards so different products had to be made for each market,increases costs and can't reap economies of scale.

  Created a single European market

  'an area without internal frontiers in which the free movements of goods,persons,services and capital is ensured'
• Advantages to UK firms of Single European market

  Offered the a larger market - of over 500 million consumers

  No tariffs=lower costs

  One product standard=reap economies of scale

  No tariffs on imported goods

  Wider range of workers to choose from

  Can expand with lower costs

  Larger niche market
• Advantages to citizens (workers and consumers) of single European market

  Raise standard of living

  More jobs

  Cheaper goods

  Live in another country

  Money/bank invest it anywhere

  Run a business anywhere
• Advantages to the economy of single European market

  Increase economic activity

  Boost spending

  Lower inflation

  More FDI

  More working=more paying tax

  Lower unemployment

  More trade
• Advantages to a business of being within a trading bloc (free trade area answer)

  Tariff free – reducing costs, allowing a business to be more

  competitive.Lower costs allow for lower prices and hence greater sales and or larger profit margins

  Larger market access – greater sales/profits

  Less bureaucracy when trading internationally

  Cheaper to import stock or raw materials

  One product standard – allows a business to reap economies of scale
• Disdvantages to a business of being within a trading bloc (free trade area answer)

  Greater competition

  It may be difficult for small domestic firms to compete with larger overseas competition

  Some countries may allow business tp produce with lower ethical or environmental standards
• Free Trade Agreement

  The UK is not a member of the EU or the Single European Market, but it is effectively in a free trade area with the EU.

  Goods and services can be sold tariff free (if the country of origin is the UK) and the product meets EU product standards.

  However, these are the standards that UK firms have been used to, they are not new standards. Lower costs, potentially

  lower priced UK exports, making them more competitive in the Single European Market compared to US or Chinese

  exporting businesses
• Free trade agreement

  However, although trade is free, there is no longer a free border This means that all UK exports to the EU and imports from

  the EU to the UK have to have full documentation proving product standards and the country of origin of all materials > This

  increases costs for UK firms and slows down trade.

  This gives UK firms access to the Single European Market – 27 Countries, 450 million consumers, GDP $16 trillion, GDP per

  capita $39,000 > Greater potential sales & profits, lower costs due to being able to reap economies of scale
• The free trade agreement will mean more competition in the UK domestic market from EU businesses, but it may also make

  it harder for some small EU business to export to the UK.

  The UK has free trade, but no longer the EU single market and possibly the main difference is that there is no longer the free

  movement of people. An estimated 5 million workers, 90% unskilled had come from the EU and provided UK business with

  the workers they required. This has resulted in many businesses, particularly those in areas such as hospitality etc. are

  experiencing labour shortages
• The UK is now free to sign free trade agreements. It has signed one so far with Australia but this will have very little impact

  on UK businesses or the economy.

  Some large business threatened to move out of the UK if the UK left the single market such as Toyota and Nissan as they

  were concerned about tariffs on their exports to the EU and the bureaucracy and potential import tariffs preventing JIT

  from working, but no major firms have relocated to the EU.
• Disadvantages to UK firms of Single market

  Greater competition

  Smaller firms can't compete with larger international ones

  Harder for start-ups to enter the amrket
• Disadvantages to workers and consumers of single market

  Lower wages overseas worker work for less

  language barriers
• Disadvantages to economy of single market

  Making decisions for british economy

  More imports means more money leaving the country

  More pressure on NHS,housing and schools because 93% of overseas workers are unskillled meaning they are in low paid jobs so don't pay much tax.
• UK balance of payments exports-imports
• NAFTA

  China's wage rate is going up and China's economy is getting bigger and richer,this means some companies are moving inland and some elsewhere to get cheaper labour
• Labour costs are important in the production of goods depending on ehat percentage of final cost of making product is labour costs
• Advantage to a company of Mexican membership NAFTA

  No tariffs

  Cheaper labour

  Lower transport costs(rather than from china,mexico on the border of America)
• Evaluate the case of a global electronics manufacturer increasing FDI in Mexico rather than China.

  China - well made product,good knowledge,experience but labour costs are increasing

  Mexico - no tariffs,cheaper labour closer to market