Trading Bloc
Group of countries encouraging free trade and economic integration through the reduction of trade barriers between them.
Trading blocs or high levels of economic integration in general provide a multitude of the benefits experienced in free trade in the long run. These are discussed below:
Advantages of Trading Blocs
Trade Creation (HL Only)
- When economies enter a trading bloc, trade between countries alter as trade between member countries becomes prevalent due to reduced trade barriers.
- This causes trade with non-member countries to decrease as common trade restrictions are applied.
Trade Creation
Scenario where lower cost imports are replaced with higher cost imports or domestic production.
Country A initially imports laptops from Country C, where the price, including a 10% tariff, is $1,100. Meanwhile, laptops from Country B cost $1,200, making Country C the preferred trade partner. However, when Country A joins a trading bloc with Country B, tariffs on B’s goods are eliminated. This reduces the price of laptops from Country B to $1,000, making them cheaper than those from Country C. As a result, Country A switches its imports from Country C to Country B, increasing trade within the bloc and benefiting consumers with lower prices, while reducing exports for producers in Country C.
Greater Access to Markets offer potential for Economies of Scale
- Entering a trading bloc provides firms the ability to sell goods to member countries without much difficulties, which leads to an increase in exports.
- As the economy now has free trade with other economies, firms can grow substantially as the size of the market increases, hence export increases.
- This allows firms to achieve lower average costs (theory of economies of scale).
Greater Employment Opportunities
- Discussed previously, if a trading bloc becomes a common market or monetary union, it allows for free movement of factors of production such as capital and labour.
- Therefore, unemployed individuals in an economy can seek for employment or work in other economies where more opportunities may be present.
Stronger bargaining power
- Oftentimes, individual countries lack bargaining power in multilateral organisations (such as WTO), especially if they are geographically or economically small.
- When a country is in a trading bloc, they can therefore bargain as a trading bloc, which holds much greater power.
- This increases chances of achieving their respective objectives as they are more likely to be listened to.
The EU negotiates trade deals as a single entity, giving it more leverage than individual member states would have on their own.
Greater Political Stability and Cooperation
- Being part of a high level of economic integration such as trading blocs reduce the probability of hostile behaviour arising between countries.
- This is because all economies become interdependent through increased trade, labour, financial flows, etc.
- In fact, it promotes political stability and fosters cooperation.
