3.1.3 Trading blocs

Question 1

trade blocs

Answer 1

Groups of countries where barriers to trade are reduced/eliminated between them

Question 2

free trade areas

Answer 2

Groups of countries that trade freely with eachother, but each member country has its own individual trade policies for the rest of the world

Question 3

common markets

Answer 3

Completely free trade internally and a single unified trade policy covering all member countries trade with the rest of the world

Question 4

single markets

Answer 4

Involves free movement of people and capital; individuals in each country can work in other member countries → can have harmonised regulations and no border controls like EU

Question 5

trade creation

Answer 5

Occurs when there is an increase in the total amount of goods and services traded because of reduced trade restrictions within a trading bloc

Question 6

trade diversion

Answer 6

Occurs when a trading bloc imports from non member countries, enabling businesses within member countries to increase sales inside the trading bloc

Question 7

impact of trading blocs

Answer 7

• Can be a free trade area or a tightly integrated common market. A single market has harmonised business regulations so that businesses compete on equal terms
• Creation and growth of trade blocs has made it much easier for access to members countries markets
• Encourage specialisation and open up new markets
• Free trade area = NAFTA
• Common/single market = EU
• ASEAN = reduced TB between members, indonesia/malaysia/philippines/sinagpore and thailand
• Encourage and increase trade amongst member states → trade creation

BUT
- Create trade diversion → members may trade more with each other and less with the outside world

Question 8

benefits of trading blocs

Answer 8

• Access to a member country markets without trade restrictions means export levels increase
• No tariff on imports from bloc members, lower prices benefit businesses and consumers
• Possibility of economies of scale
• Spreading of risk
• A trading bloc creates a larger market which attracts foreign direct investment
• Greater competition within the TB can increase incentives for firms to strive for efficiency, cutting costs and prices

Question 8

drawbacks of trading blocs

Answer 8

For free trade areas
- No protection for domestic industries competing with other bloc members
- Stiffer competition for domestic producers
- Reaching agreement with member states is a slow process

For common markets
- A common external tariff can increase costs of raw materials or supplies from outside the bloc
- Harmonised regulations may not suit all businesses, especially those without ethical committments

Question 9

impact of trading blocs on firms

Answer 9

• Businesses that can increase exports within a trading bloc will always benefit
• Businesses that compete with other producers in other member countries will face more competition
• All businesses will have an incentive to adapt, by upgrading their product, investing, increasing productivity, cutting costs, increasing CA and cutting prices
• In the EU competition law reduces anti-competitve practices
• Some businesses may resist regulations that aim to improve working conditions

Question 10

growing interdependence due to trading blocs

Answer 10

• Growth of trade and FDI has made all economies increasingly reliant
• Both firms and govs are likely to be affected by adverse events in the economies in which they trade
• 2008-9 financial crisis, brexit, lower commodity prices affect incomes of developing countries
• Positive trends in economies have an effect on export trends in other countries