4-1-5-trading-blocs

Expansion of trading blocs

• A trading bloc is a group of countries that form an agreement to reduce or eliminate protectionist measures between each other

• Joining a trading bloc is a key method of increasing trade liberalisation and leads to trade creation

  • Trade creation means that businesses are able to enter new markets, which can lead to an increase in sales volume and sales revenue

• Three of the largest trading blocs include the European Union (EU), the Association of Southeast Asian Nations (ASEAN) and USMCA (United States, Mexico and Canada, formerly known as NAFTA)

The European Union

• The EU is an economic union, originally formed in 1993

• Countries in Europe can apply to join the union, and, as of February 2023, there are 28 countries in the union

• Being a member of the EU includes the free movement of goods and people between countries

  • Countries within the union have no trade restrictions between themselves

  • Countries within the union have common external barriers (e.g. tariffs) to countries outside of the union

• The UK voted to leave the EU in 2016 and officially left in 2020

Association of Southeast Asian Nations

• ASEAN was originally formed in 1967

• In February 2023, ten countries were part of this free trade area

• The ASEAN free trade area is less integrated than the EU, as it does not allow for the free movement of people between the countries, whereas the EU does

  • A free trade area aims to achieve the free flow of goods in the region (eliminating trade barriers)

  • Free trade areas lower business costs, increase market size and help businesses generate economies of scale

United States, Mexico and Canada

• USMCA is the trade bloc that superseded NAFTA, which was established in 1994 between Canada, Mexico and the USA. The aim was to promote free trade between these countries

• In 2018, the terms of the agreement were renegotiated, and it was renamed

• Many USA businesses relocated their manufacturing to Mexico, as goods could be produced there much more cost-effectively due to the lower wages paid to Mexican workers

  • The products could then be imported back into the USA without any tariffs being incurred

• Mexico benefitted from this agreement, as it helped to create many new industries and jobs within the country

  • However, most of the benefits occurred in the north of the country, close to the USA border

The impact of trading blocs on businesses

• The impact of trading blocs on a business is dependent on whether the business trades in or out of the trading bloc 

• Businesses outside the trading bloc will face higher costs from protectionist measures, such as tariffs, and trying to meet legal requirements inside the trading bloc

  • This will make these businesses less competitive when trying to sell goods to member countries within the bloc

  • Being outside the bloc is likely to decrease their sales volume to countries within the bloc

Benefits for businesses inside the trading bloc

1. Access to more markets 

   • Businesses are able to sell to more customers due to the free movement of goods

2. External tariff walls 

   • An external tariff wall is a tax applied to imported goods by a group of countries that have formed a trade agreement

   • This protects businesses within the trading bloc from competition from businesses outside of the trading bloc

3. Infrastructure support 

   • Businesses may gain additional support from the government to enable them to maintain their competitiveness against businesses in countries within the trading bloc 

4. Free movement of labour 

   • Trading blocs may also have free movement of labour, allowing businesses to source workers from a wider pool

   • A higher supply of labour may push wages lower, leading to reduced costs for businesses 

   • E.g. citizens of EU countries have the right to work in any member state and to be treated equally as citizens of that state

Drawbacks for businesses inside the bloc

1. Increased competition 

   • There is increased competition for businesses within the trade bloc, which may be more of an issue for small businesses, as they have fewer resources available with which to compete

   • Businesses with monopoly power can increase their monopoly by eliminating competitors in other countries within the bloc

     • E.g. the UK supermarket industry faced increased competition from the German supermarkets Aldi and Lidl when the UK was part of the EU

2. Common rules and regulations 

   • In order to operate as one market, new rules and regulations may be put in place that all businesses must adhere to

     • E.g. the EU working time directive states that employees can only work a maximum of 48 hours per week

3. Retaliation 

   • External tariffs set against countries outside of the trading bloc may lead to retaliation from these countries

4. Inefficiency 

   • Although there is increased competition between countries within the bloc, there is less competition from businesses in countries outside of the bloc

     • This may reduce the incentive of businesses to be more efficient

   • Trading blocs also lead to trade diversion, which means trade is taken away from efficient producers that operate outside of the trade bloc and replaced by trade within the bloc