4.1.5 Trading Blocs

🔗 Trading blocs – An agreement made between governments where trade barriers are reduced or eliminated among the participating states.

🔗 Preferential trade area – A trading bloc that gives preferential access to certain products from the participating countries.

🔗 Free trade area – A group of countries that have few or no tariffs or quotas between each other.

🔗 Customs union – A group of countries that have agreed to charge the same import duties as each other and usually to allow free trade between themselves.

🔗 Common market – A group of countries imposing few or no duties on trade with one another and a common tariff on trade with other countries.

• In the past, most countries added tax on any goods imported from abroad.
• After WW2, free trade started to be a concept and trade blocs were established.
• There are now 13 recognised trade blocs and these are growing.

Name	Number of Members	Notable members	Population and GDP	Main features
European Union (EU)	28	UK France Germany Belgium Italy	508 million inhabitants GDP: $19.7 trillion	Founded on 1st November 1993 Single market Customs Union
Association of South East Asian Nations (ASEAN)	10	Singapore Malaysia Thailand Vietnam Indonesia	635.9 million inhabitants. GDP: $2.4 trillion	Founded in August 1967 AEC allows free movement of goods, services, investments and labour.
North American Free Trade Association (NAFTA)	3	USA Canada Mexico	444.1 million inhabitants GDP: $20.7 trillion	Founded on January 1st 1994 Preferential trade area allows free movement of goods and services but not people.

Pros and Cons of Trade Blocs

• Free movement of goods and services -> Enables firms to be cost-competitive internationally -> Able to lower prices without reducing profit margins
• Access to a larger market (E.G Europe with EU) increases the size of the customer base -> Benefit from economies of scale -> Lower cost per unit -> Higher sales from lower prices -> Increased market share and strength of the brand
• Factor mobility in single markets enables firms to employ highly skilled workers without incurring additional costs -> Able to benefit from HR Economies of scale -> More cost-competitive
• Increased size of the market means more competition -> Constantly have to innovate and invest to maintain competitiveness -> Financial strain and potentially lower profits
• Less resilient to economic shocks (E.G EU recession) -> Will have a knock-on effect on all businesses/branches of business within the trading bloc -> Significant fall in profits and sales
• Firms may not get an agreement that suits them -> Competitive disadvantage to other multinational corporations (E.G Higher costs with regulations or taxes) -> Loss of global market share