Trading Bloc
Group of countries encouraging free trade and economic integration through the reduction of trade barriers between them.
There are different types of trading blocs, where each can be distinguished by their degree of economic integration.
Free Trade Area (FTA)
Free Trade Area
The most common type of economic integration where a group of countries agree to gradually remove trade restrictions.
With FTAs:
- Countries still get to decide the trade restrictions imposed on non-member countries (not part of the FTA).
- Between member countries, there can be free trade on some goods but restrictions on others.
An real-life FTA is the The North American Free Trade Agreement (NAFTA) consisting of Canada, Mexico and the USA.
However, some issues that may arise since countries can impose their own barriers to non-member countries.
- Countries with lower trade restrictions may import a higher quantity of a good from non-member countries and trade it with member countries.
- Hence, countries that have higher trade barriers may end up importing more goods than they would like, defeating the purpose of their 'higher trade barriers'.
Customs Unions
Customs Union
A type of trading bloc that fits all the criteria of being an FTA but also adopts a common policy towards non-member countries.
With Customs Unions:
- Countries cannot have their own policies for those outside the customs union.
- Further, they represent as one entity when making trade agreements with non-member countries.
Hence, they showcase a higher degree of economic integration than pure FTAs.
ExampleReal-life customs unions include: Central European Free Trade Agreement (CEFTA) and South African Customs Unions (SACU).
However, due to the loss of freedom in policies towards non-members, this can cause disagreements and long discussions between nations.
Common Markets
Common Markets
A form of trading bloc that builds on a customs union by allowing the free movement of goods, services, and factors of production (labour, capital, etc.) among member countries.
Common markets are the higher form of economic integration where:
- Labour can cross borders and are free to find employment in other countries.
A common market is the European Economic Community (this is the market that lead to the European Union today).
- They face advantages in the movement of factors since individuals demanding employment can easily move to find work in other countries.
- Further, countries having shortages in factors of production have a greater access to the resource market.
- However, due to their even higher economic integration, countries need to be willing to give up some of their policy-making power (loss of some sovereignty) which is difficult to do.
Due to this, there are a lower number of common markets in the world.
Self review- Explain the differences between the three types of trading blocs.
- Highlight some issues that may arise with higher economic integration.
To what extent does economic integration improve economic well-being? Consider the trade-offs between efficiency and equity.
