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Trading blocs are usually groups of countries in specific regions that manage
and promote trade activities. Trading blocs lead to trade liberalisation (the
freeing of trade from protectionist measures) and trade creation between
members, since they are treated favourably in comparison to non-members.
The World Trade Organisation (WTO) permits the existence of trading blocs,
provided that they result in lower protection against outside countries than
existed before the creation of the trading bloc .
European Union (EU) – a customs union, a single market and now with a
single currency
North American Free Trade Agreement (NAFTA) between the USA, Canada
and Mexico
South Asian Free Trade Area (SAFTA) created in 2006 with countries such as
India and Pakistan
Trade creation occurs when a country enters a free trade area / agreement or
becomes involved in a customs union in which there is free trade between
members but also a common external tariff.
Trading Blocs and Trade Diversion
When a country joins a customs union it might initially be trading freely with a
low cost supplier in a 3rd party nation.
Once inside a customs union, the country must now adopt a common external
tariff which will then increase the cost of importing from the 3rd party nation.
These higher prices might affect consumers directly e.g. higher prices for
food.
Or they might affect consumers indirectly because producers now have to pay
more for their imports from the 3rd party.
Source: https://www.tutor2u.net/business/reference/what-is-a-trading-bloc