Unit 70: Trading Blocs

Unit 70: Trading Blocs

1. Expansion of trading blocs

   • Countries prefer to trade within their geographical region: It is cheaper to transport goods shorter distances and logistical costs will be lower
   • Countries have cultural ties and regional knowledge of nearby countries
   • Regional trade agreements (RTA's) are made between two or more countries within a geographical region, and are designed to facilitate trade by bringing down barriers
   • RTA's create trading blocs: A trading bloc is a group of countries that have signed a regional trade agreement to reduce or eliminate tarriffs and other protectionist barriers between themselves

2. Preferential trading area

   • Allow certain types of products from participating countries to receive a reduced tariff rate. Beginning process of economic integration and may become a free trade area over time

3. Free Trade Areas

   • Exists where member states remove all trade barriers between themselves , but each member state keeps different barriers to non-member states
   • In order to protect a region countries may use rules of origin - a defined amount of a product or service must be certified to have been created within that region

4. Customs Unions

   • Similar to a free trade area, except non-members adopt a common set of barriers against non-members
   • Products can be moved freely throughout the countries within the union

5. Common Markets

   • More integrated than free trade agreements or customs unions since labour and capital can move freely across the member states
   • Tariffs are generally removed and non-tariff barriers eliminated. Workers can relocate from one country to another without restiction
   • Members of a common market must work together on economic and political issues that affect the market

6. Single market

   • Almost all trade barriers between members have been removed and common laws and policies work to make the movement of goods, labour and capital between countries as easy as the movement within countries
   • Borders, standards and taxes are harmonised as much as possible so as not to interfere with commerce between members

7. Economic Unions

   • Type of trade bloc involving both a customs union and a common market. It's aim is normally closer political, cultural and economic ties between member states.
   • When an economic union involves a common currency it is called and economic and monetary union.

8. Examples of Trading Blocs

   • The EU - single market
   • ASEAN - free trade agreement
   • NAFTA

9. Factors to consider in trading blocs

   • Where to produce
   • Where to sell
   • How to enter a market
   • Business strategy

10. Benefits of trading blocs

    • Increase in inward FDI
    • Results in greater competition within the market
    • The reduction of protectionist measures should stimulate greater demand within the trading bloc
    • The combination of greater competition, economies of scale and greater trade should result in a more efficient market