4.1.5 Trading Blocks

• trading bloc 


  a group of countries that form an agreement to reduce or eliminate protectionist measures between each other
• trade liberalisation


  • Joining a trading bloc is a key method of increasing trade liberalisation and leads to trade creation

  -Trade creation means that businesses are able toenter new marketswhich can lead to an increase insales volumeandsales revenue
• Three of the largest trading blocs


  • The European Union (EU)

  • The Association of Southeast Asian Nations (ASEAN)

  • USMCA (United States, Mexico and Canada, formerly known as NAFTA)
• The Impact of Trading Blocs on Businesses


  • The impact on a business of trading blocs is dependent on whether the business trades in or out of the trading bloc 
  • Businesses outside the trading bloc will face higher costs from protectionist measures such as tariffs and trying to meet legal requirements inside the trading bloc
  • This will 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 
• The benefits for businesses of belonging to a trading bloc


  • Access to more markets 

  • External tariff walls

  • Infrastructure support 

  • Free movement of labour 
• Access to more markets 


  Businesses are able to sell to more customers due to free movement of goods
• External tariff walls 

  • n external tariff wall is a tax applied to imported goods by a group of countries that have formed a trade agreement
  • This protects businesses within the trading bloc from competition from businesses outside of the trading bloc
• External Tariff walls


  • an external tariff wall is a tax applied to imported goods by a group of countries that have formed a trade agreement
  • This protects businesses within the trading bloc from competition from businesses outside of the trading bloc
• Infrastructure support 


  Businesses may gain additional support from the government to enable them to maintain their competitiveness against businesses in countries inside the trading bloc 
• Free movement of labour 


  • Trading blocs may also have free movement of labour allowing businesses to source workers from a wider pool
  • A higher supply of labour may push wages lower, leading to reduced costs for business 
  • E.g. Citizens of EU countries have the right to work in any Member State and to be treated equally as citizens of that State
• Drawbacks of being in a trade block


  • Increased competition

  • Common rules and regulations

  • Retaliation

  • Inefficieny
• Increased competition


  • There is increased competition for businesses within the trade bloc which may be more of an issue for small businesses as they have less resources available with which to compete

  • Businesses with ["monopoly power "] can increase their monopoly by eliminating competitors in other countries within the bloc.
• Common rules and regulations 


  • In order to operate as one market, new rules and regulations may be put in place that all businesses must adhere to
• Retaliation 


  External tariffs set against countries outside of the trading bloc may lead to retaliation from these countries
• Inefficiency 


  • Although there is increased competition between countries within the bloc, there is less competition from businesses in countries outside of the bloc
  • This may reduce the incentive of businesses to be more efficient
  • Trading blocs also lead to trade diversion which means trade is taken away from efficient producers who operate outside of the trade bloc and replaced by trade within the bloc