Trading blocs Flashcards
What is a trading bloc
A group of countries that have signed an agreement to reduce or eliminate any trade barriers or other protectionist measures among themselves
What is the unique feature of a preferential trading area
Where trade barriers are reduced or removed on some goods traded between member countries
What is the unique feature of a free trade area
The reduction or removal of trade barriers on all goods between member countries
What is the unique feature of a customs union
Common external trade barriers with non-member countries
What is the unique feature of a common market
Free movement of factors of production
What is the unique feature of a monetary union
Two or more members share the same currency in which the exchange rate is monitored by one central back
-Common currency
-Co-ordinated monetary policy
What is trade creation
Where trading blocs result in high cost producer outside the trading bloc being replaced by a low cost producer within the trading bloc
What is trade diversion
Where trading blocs result in low cost producer outside the trading bloc being replaced by a high cost producer within the trading bloc
Advantages of trading blocs
-Free trade encourages specialisation and will increase output if countries follow the theory of comparative advantage
-Firms in member countries have a larger consumer market
-Increased competition will lead to innovation as well as lower prices
-Increased choice for consumers
-Job creation
Disadvantages of trading blocs
-Distorts world trade
-Trade diversion could occur
-Unequal distribution of trade
-Firms in non-member countries may be less competitive in international markets
-Reduction in competition
ADVANTAGESSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS OF TRADINGGGGGGGGGGGGGGGGGGG BLOCSSSSSSSSSSSSSSSSS
- Trade Creation
Reduced tariffs and quotas allow countries to import from lower-cost producers within the bloc.
→ Replaces high-cost domestic or external suppliers with more efficient ones.
→ Improves allocative efficiency, lowers prices, and boosts consumer surplus.
→ Encourages specialisation in line with comparative advantage.
🔹 2. Increased Market Size for Firms
Access to a larger customer base encourages firms to scale up production.
→ Leads to economies of scale (lower average costs).
→ Increased productive efficiency and competitiveness on a global level.
→ Especially important for smaller domestic firms entering export markets.
🔹 3. Foreign Direct Investment (FDI) Boosts
Firms outside the bloc are more likely to invest in member countries to gain access to the bloc’s market.
→ Increases capital inflows, creates jobs, and transfers technology and skills.
→ Can support economic development and boost long-run aggregate supply.
🔹 4. Stronger Political and Economic Ties
Promotes regional cooperation and reduces the chance of political conflict.
→ Shared economic interests = greater stability and policy alignment.
→ Increases negotiation power in global trade (e.g. EU in WTO talks).
🔹 5. Labour and Capital Mobility (in Common Markets)
In blocs like the EU, workers and firms can move freely between member states.
→ Leads to more efficient allocation of resources.
→ Helps fill skill shortages and improves labour market flexibility.
DISADVANTAGESSSS OF TRADINGGGGGGGGGGGGGGGG BLOCSSSSSSSSSSSS
- Trade Diversion
A country may start importing from a higher-cost producer within the bloc, due to external tariffs on cheaper goods from outside.
→ Replaces efficient non-member producers with inefficient member ones.
→ Results in a welfare loss, damaging allocative efficiency.
🔻 2. Loss of Sovereignty
Countries may have to conform to bloc-wide rules (e.g. competition policy, VAT rules).
→ Reduces control over independent trade, fiscal, or monetary policy.
→ Especially controversial in customs unions or monetary unions (e.g. Eurozone).
🔻 3. Uneven Gains Between Members
Larger or more developed economies may benefit more due to stronger industrial bases.
→ Can widen inequality within the bloc.
→ Smaller economies may become over-dependent on dominant members (e.g. Greece & Germany in EU).
🔻 4. Costs of Compliance and Regulation
Businesses must meet common standards and comply with regulations, which may be costly or bureaucratic.
→ Especially hard for small and medium-sized enterprises (SMEs).
→ Can act as a non-tariff barrier and limit flexibility.
🔻 5. Risk of Retaliation or Exclusion from Global Trade
Preferential treatment for bloc members can exclude non-members, who may retaliate with tariffs or withdraw cooperation.
→ Can undermine global free trade and create fragmented trade systems (e.g. US vs EU-China blocs).
→ Reduces the efficiency gains from global specialisation.
