4.1.5 Trading blocs

Question 1

What is a trading bloc?

Answer 1

A trading bloc is a group
of countries that sign up
to free trade between
them, protected by a tariff
wall against imports from
outside

Question 2

In addition to free trade, some trading blocs have, or are working
towards:

Answer 2

• harmonisation of laws (all members have the same legal standards
governing business operations)
• free movement of labour.

Question 3

The attractions of trading blocs

Answer 3

• Harmonisation of laws allows one product to be made that meets
legal requirements in all member countries. This allows companies to
benefit from economies of scale.
• Countries working together within a trading bloc have more power
than individual nations to stand up to non-member countries who are using
techniques such as dumping.
• Competing in a larger ‘home’ market incentivises the boosting of
efficiency for firms in member states.

Question 4

Dumping

Answer 4

Dumping is a term used
to describe the practice of
selling off excess production
in a foreign market at an
exceptionally low price, which
destroys sales for local
producers. China is frequently
accused of dumping excess
products, such as steel,
elsewhere in the world.

Question 5

EU

Answer 5

Started 1958, main members are Germany, France and 27 members in total. It operates a single market which allows free movement of goods, capital, services and people between member states.

Question 6

Association of
SouthEast Asian
Nations (ASEAN)

Answer 6

1967, Indonesia,
Thailand. Vietnam
(10 in total)

Question 7

MERCOSUR

Answer 7

1991. Brazil,
Argentina,
Uruguay
16 in total) (Spanish for
South American
Common Market)

Question 8

NAFTA

Answer 8

Stands for North American Free Trade Association. USA,
Canada
and Mexico
(3 in total)

Question 9

EAC

Answer 9

2000. Kenya,
      Tanzania
      (5 in total). East African
      Community

Question 10

The EU and the single market

Answer 10

27 members and a total population of around 445
million consumers. These consumers, in global terms, are relatively affluent.
The EU’s single market remains an incredibly attractive market for EU
companies to access. This explains why probably the critical aspect of Brexit
negotiations is the terms of access to the EU’s single market for British firms.

a customs union, a single market and now with a single currency

Question 11

The ASEAN trading bloc

Answer 11

The ten full members of ASEAN (see Table 18.8) operate in an Asia
dominated by the economic success of China, Japan and South Korea.
ASEAN’s members try to work constructively alongside these giant
neighbours. After all, much of ASEAN’s success has been in feeding the
might of their bigger neighbours’ manufacturing machines.

Question 12

ASEAN’s full member states

Answer 12

Brunei
Thailand
Myanmar (Burma)
Laos
Vietnam. Cambodia. Philippines. Indonesia. Malaysia. Singapore.

Question 13

NAFTA trading bloc

Answer 13

With only three members - Canada, Mexico and the USA
_ NAFTA
is a tense trading bloc. At the heart of the tension is low-cost Mexico’s
ability to attract companies looking for a low-cost manufacturing base
from which they can import freely to the world’s largest domestic market:
the USA. Resentment of this aspect of NAFTA’s existence was probably
the underpinning reason behind the election of Donald Trump to the US
presidency in 2016.

Question 14

Can you generalise benefits and drawbacks of being in a trading bloc

Answer 14

It is impossible to generalise about whether membership of a trading bloc
is overall beneficial or negative to businesses in any country. Different
industries will benefit more from free trade than others. In general, it tends
to be manufacturing firms that benefit more than others from membership
of a trading bloc.

Question 15

Advantages of trading blocs

Answer 15

Free movement of goods between members gives the potential to create a large single market. External tariff walls insulate the business from
competition from another part of the world. As trade grows between neighbours, it becomes
economic (and necessary) for governments to
provide infrastructure support. Membership of a trading bloc allows significant
benefits to businesses located within them,
especially a much larger market to sell to
without any barriers to trade.

Question 16

Drawbacks of trading blocs

Answer 16

Competition increases due to freer trade, so those with monopoly power may find it competed away. To create a single market, new rules and
regulations may be agreed, including minimum wage rates. The availability of easily accessed neighbouring
markets may reduce enterprise in relation to distant but dynamic ones such as China. Within a geographically proximate bloc, there
may be common factors that together become common problems, e.g. low commodity prices.

Question 17

Free trade areas

Answer 17

these are blocs in which groups of countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries.

Question 18

Custom union

Answer 18

union where members remove all trade barriers and adopt common set of barriers on non-member countries

Question 19

Common market

Answer 19

goods, labour and capital moves freely with members where non-tariffs barriers are removed

Question 20

Single market

Answer 20

almost all barriers are removed and common laws to make movement easier

Question 21

Economic Union

Answer 21

uses common currency

Question 22

Benefits of EU

Answer 22

Trade creation

Competition

Access to market

Freedom of movement

Question 23

Trading blocs tutor2u

Answer 23

Trading blocs are usually groups of countries in specific regions that manage and promote trade activities. Trading blocs lead to trade liberalisation (the freeing of trade from protectionist measures) and trade creation between members, since they are treated favourably in comparison to non-members.

The World Trade Organisation (WTO) permits the existence of trading blocs

Question 24

Trade diversion

Answer 24

Trade diversion is a switch from a lower-cost foreign source/supplier outside of a customs union towards a higher-cost supplier located inside the customs union.

Question 25

Trade creation

Answer 25

Trade creation is the movement from a higher cost source of output to a lower cost source of supply as a result of joining a trade agreement.