4.1.5 Trading Blocs

• • A trading bloc is a group of countries that form an agreement to reduce or eliminate protectionist measures between each other.
• Joining a trading bloc is a key method of increasing trade liberalisation and leads to 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.
• Three of the largest trading blocs include The European Union (EU), The Association of Southeast Asian Nations (ASEAN), and USMCA (United States, Mexico and Canada, formerly known as NAFTA)
• • The European Union is an economic union, originally formed in 1993
  • Countries in Europe can apply to join the union and as of February 2023, there are 28 countries in the union
• • Being a member of the EU includes free movement of goods and people
  • Countries within the union have no trade restrictions between themselves
  • Countries within the union have common external barriers (e.g. tariffs) to countries outside of the union
• Free trade areas

  • A free trade area aims to achieve free flow of goods in the region (eliminating trade barriers)
  • Free trade areas lower business costs, increase  market size and help businesses to generate economies of scale
• The ASEAN free trade area is less integrated than the European Union as it does not allow for the free movement of people between the countries.
• USMCA is the trade bloc that superseded NAFTA, which was established in 1994 between Canada, Mexico and the USA.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

  In 2018, the terms of the agreement were renegotiated and it was renamed.
• Mexico benefitted from USMCA as it helped to create many new industries and jobs within the country.
• Impact of trade bloc on business outside trading bloc

  • Face higher costs from protectionist measures- tariffs and trying to meet legal requirements inside the trading bloc.
  • Make them less competitive when trying to sell goods to member countries within the bloc.
  • Being outside the bloc is likely to decrease their sales volume to countries within the bloc.
• Benefits of being inside trade bloc

  • Access to more markets - Able to sell to more customers due to free movement of goods.
  • External tariff walls - protects businesses within trading bloc from competition from businesses outside trading bloc.
  • Infrastructure support - Businesses gain additional support from government to maintain competitiveness against businesses in countries inside trading bloc.
  • Free movement of labour - allowing businesses to source workers from a wider pool.
  • A higher supply of labour may push wages lower = reduced costs for business .
• An external tariff wall is a tax applied to imported goods by a group of countries that have formed a trade agreement
• Drawbacks of being inside the bloc

  • Increased competition - an issue for small businesses as they have fewer resources available with which to compete.
  • Businesses with monopoly power increase their monopoly by eliminating competitors in other countries within the bloc.
  • Common rules and regulations
  • Retaliation - external tariffs set against countries outside of the trading bloc may lead to retaliation from these countries.
  • Inefficiency - less competition from businesses in countries outside of the bloc = reduce incentive of businesses to be more efficient.
• Trading blocs also lead to trade diversion - trade is taken away from efficient producers who operate outside of trade bloc & replaced by trade within the bloc.