Trade blocs
A trade bloc is a type of intergovernmental agreement, where barriers to trade (tariffs and others) are reduced or eliminated among the participating states.
Countries tend to trade within their geographical region.
Transport costs will be lower.
Cultural ties and familiarity with nearby markets reinforce trading preferences.
Trading blocs can take a number of different forms:
1. Preferential trading area (PTAs)
The Association of Southeast Asian Nations (ASEAN) has a PTA with China.
2. Free trade area (FTA)
Member countries remove all trade barriers, such as tariffs and import quotas, between themselves, but each member state keeps different barriers against non-member states.
Nafta is an example of a FTA.
Member countries: The USA, Canada & Mexico.
Doing business in Mexico: details here.
Doing business in the USA: details here.
Tariffs have been eliminated on most manufactured goods.
There is no free movement of labour.
There is no common external trade policy
3. Customs union
Similar to a FTA, except that members adopt a common set of barriers against non members.
An example is CARICOM or the 'Caribbean Community'.
4. Common Market
Goods, labour and capital can move freely across the member states.
An example of a common market is ASEAN.
Asean was founded in 1967 to promote growth and social progress among its members.
Member countries have a population of 500 million+.
Fast facts: ASEAN. Details here.
5. Single market.
Trade barriers have been removed and border crossings, quality and safety standards and taxes are harmonised.
The EU is an example of a single market, with free movement of goods, services, capital and people.
The EU also acts as a customs union.
6. Economic and monetary union.
An economic union with a common currency.
The Euro is used by 19 member states.
Impact on businesses of trading blocs:
It allows a country to specialise in line with a country's comparative advantage.
The market for goods and services will increase.
This hopefully allows businesses to benefit from economies of scale.
Resources will be easier to source and labour easier to recruit.
Possible disadvantages:
Regionalism vs. Multinationalism:
Trade is favoured in the region rather than around the world.
Loss of Sovereignty:
A trading bloc, particularly when it is coupled with a political union, is likely to lead to at least partial loss of sovereignty for its participants.
Inefficient producers may be protected from competition.
Advantages / disdavantages trade blocs. Details here.
