3.1.3

• Trade creation

  A country consumes more imports from a low cost producer, and fewer from a high cost producer
• Trade diversion

  Trade shifts to a less efficient producer, usually a more expensive one inside a trading bloc instead of a cheaper one outside
• With more trading blocs

  Trade has been created between members, but diverted from elsewhere
• Protectionist barriers are often imposed on countries who are not members, so trade is diverted from producers outside the bloc to producers within the trading bloc
• The UK trades mainly with the EU, at the expense of former trade links in the Commonwealth
• Free trade area

  • Countries agree to trade goods with other members without protectionist barriers
  • Allows members to exploit their comparative advantages, which increases efficiency
• Customs union

  • Countries have established a common trade policy with the rest of the world, using a common external tariff
  • They also have free trade between members
• Common market

  • Establishes free trade in goods and services, a common external tariff and allows free movement of capital and labour across borders
• Reduced transaction costs

  No barriers to trade or border controls, so it is cheaper and simpler to trade
• Economies of scale

  Firms can take advantage of a larger potential market in which to trade
• Enhanced competition

  Firms operate in a more competitive market, becoming more efficient and leading to a better allocation of resources
• Migration

  The supply of labour is increased, which could help fill labour shortages, but some countries might lose their best workers
• Growing interdependence

  Trading blocs create a high degree of dependency on the performance of member economies, increasing vulnerability to external shocks and meaning economic decisions of one member state affect others
• The effects of the global credit crunch in 2008 and 2009 spread across the globe due to this level of interdependence