4.1.5 Trading Blocs Flashcards
What is a trading bloc?
- 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 & leads to trade creation - Refers to increase in economic welfare from joining a free trade area
Trade creation means that businesses are able to enter new markets which can lead to an increase in sales volume and sales revenue
What are the 3 largest trading blocs?
- EU (European union)
- ASEAN (The association of southeast Asian Nations
- NAFTA (United States, Mexico & Canada)
What is the European Union?
- 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
What is the Association of Southeast Asian Nations (ASEAN)
- The ASEAN free trade area is less integrated than the European Union as it doesn’t allow for free movement of people between countries, whereas European Union does
- 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
What is NAFTA?
- Many USA businesses relocated their manufacturing to Mexico as goods could be produced there much more cost effectively due to the lower wages paid to Mexican workers
- The products could then be imported back into the USA without & tariffs being incurred
- Mexico benefitted from this agreement as it helped to create many new industries & jobs within country
- However, most of the benefits occurred in the north of the country close to the USA border
What are the impacts of trading blocs on businesses?
- Impact of trading blocs is dependent on whether business trades in or out of trading bloc
- Businesses outside trading bloc will face higher costs from protectionist measures such as tariffs & trying to meet legal requirements inside trading bloc
- Making them less competitive when trying to sell goods to member countries within the bloc
Being outside the bloc is likely to decrease sales volume to countries within the bloc
What are the benefits of trading blocs for businesses?
Access to more markets:
Businesses are able to sell to more customers due to free movement of goods
-External tariff walls:
- This 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 government to enable them to maintain their competitiveness against businesses in countries inside 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
What are the drawbacks for businesses inside the bloc?
Increased Competition
- Increased competition for businesses within trade bloc, which may be more of an issue for small businesses as they have fewer 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 & Regulations
- In order to operate as one market, new rules & 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
