Trading Blocs

A trading bloc is a group of countries that integrate economically, by reducing trade barriers. They can also sometimes collectively impose tariffs and other barriers to outside countries. They are therefore, to a varying extents, singular economic entities (at least when it comes to international trade).

There are 3 levels of trading blocks the IB wants you to know:

Free Trade Areas/Agreements (AO2)

• A trading bloc with free trade between member countries

• Member countries can still impose different trade restrictions with non-member countries 

Customs Unions (AO2)

• A trading bloc with with free trade within member countries

• Member countries impose the same trade restrictions with non-member countries

Common Markets (AO2)

• A trading bloc with free trade within member countries

• Member countries impose the same trade restrictions with non-member countries

• The 4 factors of productions (land, labor, capital, and enterprise) can move freely between member countries

Advantages and Disadvantages of Trading Blocs (AO3)

Advantages:

• Greater access to markets offer potential for economies of scale

• With freedom of labor, there are greater employment opportunities

• Membership in a trading bloc may allow for stronger bargaining power in multilateral negotiations

• Greater political stability and cooperation: Interdependence between countries encourages cooperate together for the greater good.

• Trade creation (HL only): Because trade barriers are removed, it may become cheaper to trade with member countries. Hence, trade shifts from outside countries to member countries, creating new trade for members of the trading bloc.

Disadvantages: 

• Loss of sovereignty: Because entering blocs means countries have to make rules with other countries, they can no longer just do as they please. This was a big driving force for Brexit, for example.

• Challenge to multilateral trading negotiations: Because many countries are involved in such treaties, negotiating is difficult, as every country has different wishes.

• Trade diversion (HL only): Because trade shifts to within member countries (as mentioned in "trade creation"), inefficiencies are created as trade is no longer going to the most efficient countries. Therefore, costs may rise for producers and prices may rise for consumers.