Trading Blocs Revision Notes

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  • Created on: 02-04-13 08:50
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Milzy R
What is a trading bloc?
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:
1. 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 first small step towards the creation of a trading bloc.
2. 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.
3. Customs Union - A customs union involves the removal of tariff barriers between members, plus
the acceptance of a common (unified) 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.
4. Common Market - A `common market' is the first significant 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.
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).
What are the advantages for an individual country to have membership of a trade bloc or
· Knowing that they have free access to each other's markets, members of trade blocs 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 efficient imports. Because low cost
imports lead to lower priced imports, there is a 'consumption effect', with increased demand
resulting from lower prices.
· Producers can benefit from the application of scale economies, which will lead to lower costs
and lower prices for consumers.
· Employment may be created as a consequence of increased trade between member
· 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.

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What are the disadvantages associated with membership of a trading bloc?
The benefits of free trade between countries in different blocs are lost.
· Trading blocs are likely to distort world trade, and reduce the beneficial effects of specialisation
and the exploitation of comparative advantage.
· Inefficient producers within the bloc can be protected from more efficient ones outside the bloc.
For example, inefficient European farmers may be protected from low-cost imports from
developing countries.…read more

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How does the European Union `obstruct' trade from countries such as Ghana (Trade Trap video)
The World Trade Organisation (WTO)
Who / what is the WTO?
World Trade OrganisationThe organisation officially commenced on January 1, 1995 under the
Marrakech Agreement, replacing the General Agreement on Tariffs and Trade (GATT), which
commenced in 1948. The World Trade Organisation (WTO) is an international organisation which
oversees a number of agreements defining the "rules of trade" between its member states.…read more

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· Basic principles make life more efficient.
· Governments are shielded from lobbying.
· The system encourages good governance.
Disadvantages of WTO:
· The WTO is fundamentally Undemocratic.
· Industrialized countries benefit more than poor countries.
· Try to monopolize all basic services.
· Developed countries have an advantage over developing countries.
· Doesn't allow the participation of developing countries.…read more

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Positives and benefits achieved by the trading group for its members:
· NAFTA created the world's largest free trade area, linking 444 million people and producing $17
trillion in goods and services annually. Estimates are that NAFTA increases US GDP by as much as
0.5% a year, as a result of the elimination of tariffs, reducing the cost of trade, which creates
investment and growth.
· Increased trade.…read more

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