11/6/2019 Trading blocs - EU NAFTA | Economics Online

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Trading blocs
A regional trading bloc is a group of countries within a geographical region that protect themselves from
imports from non-members. Trading blocs are a form of economic integration, and increasingly shape the
pattern of world trade. There are several types of trading bloc:

Preferential Trade Area

Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to reduce or
eliminate tariff barriers on selected goods imported from other members of the area. This is often the rst
small step towards the creation of a trading bloc.

Free Trade Area

Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or eliminate
barriers to trade on all goods coming from other members.

Customs Union

A customs union involves the removal of tariff barriers between members, plus the acceptance of a common
(uni ed) external tariff against non-members. This means that members may negotiate as a single bloc with
3rd parties, such as with other trading blocs, or with the WTO.

Read more on customs unions.

Common Market

A ‘common market’ (or single market) is the rst signi cant step towards full economic integration, and
occurs when member countries trade freely in all economic resources – not just tangible goods. This means
that all barriers to trade in goods, services, capital, and labour are removed. In addition, as well as removing
tariffs, non-tariff barriers are also reduced and eliminated. For a common market to be successful there must
also be a signi cant level of harmonisation of micro-economic policies, and common rules regarding
monopoly power and other anti-competitive practices. There may also be common policies affecting key
industries, such as the Common Agricultural Policy (CAP) and Common Fisheries Policy (CFP) of the
European Single Market (ESM).

Read more on: Single markets.

See: The EU

See: UK trade balance with the EU

The main advantages for members of trading blocs

Free trade within the bloc 

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Knowing that they have free access to each other's markets, members are encouraged to specialise. This
means that, at the regional level, there is a wider application of the principle of comparative advantage.

Market access and trade creation

Easier access to each other’s markets means that trade between members is likely to increase. Trade
creation exists when free trade enables high cost domestic producers to be replaced by lower cost, and more
e cient imports. Because low cost imports lead to lower priced imports, there is a 'consumption effect', with
increased demand resulting from lower prices.

See: Trade creation and trade diversion

Economies of scale

Producers can bene t from the application of scale economies, which will lead to lower costs and lower
prices for consumers.

Jobs

Jobs may be created as a consequence of increased trade between member economies.

Protection

Firms inside the bloc are protected from cheaper imports from outside, such as the protection of the EU shoe
industry from cheap imports from China and Vietnam.

The main disadvantages of trading blocs

Loss of bene ts

The bene ts of free trade between countries in different blocs is lost.

Distortion of trade

Trading blocs are likely to distort world trade, and reduce the bene cial effects of specialisation and the
exploitation of comparative advantage.

Ine ciencies and trade diversion

Ine cient producers within the bloc can be protected from more e cient ones outside the bloc. For example,
ine cient European farmers may be protected from low-cost imports from developing countries. Trade
diversion arises when trade is diverted away from e cient producers who are based outside the trading area.

See: Trade creation and trade diversion.

See: EU Sugar Case

Retaliation 
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The development of one regional trading bloc is likely to stimulate the development of others. This can lead
to trade disputes, such as those between the EU and NAFTA, including the recent Boeing (US)/Airbus (EU)
dispute. The EU and US have a long history of trade disputes, including the dispute over US steel tariffs, which
were declared illegal by the WTO in 2005. In addition, there are the so-called beef wars with the US applying
£60m tariffs on EU beef in response to the EU’s ban on US beef treated with hormones; and complaints to the
WTO of each other’s generous agricultural support.

During the 1970s many former UK colonies formed their own trading blocs in reaction to the UK joining the
European common market.

See: The EU

See: Trans-paci c Trading Partnership (TPP)

See: Trans-atlantic Trading and Investment Partnership (TTIP)

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