Types of Trading Blocs (HL IB Economics)

1. Free Trade Areas (FTAs)

• A trading bloc is a group of countries who come together and agree to reduce or eliminate any barriers to trade that exist between them

• There are different levels of economic integration ranging from relatively low integration in a bilateral agreement to high integration in a monetary union e.g. the Eurozone

• Globally, there were more than 420 regional trade agreements in effect in 2022

• Each subsequent type of trading bloc has increased levels of economic integration
   

• A free trade area is a bloc in which countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries e.g Canada–United States–Mexico Agreement (CUSMA)
  

Mexico, Canada and the USA have a free trade agreement but can deal individually with Cuba as they see fit

• In the diagram above, Mexico, Canada and the USA have reduced/eliminated many trade restrictions between themselves

  • The USA refuses to trade with Cuba and has placed a complete ban on all exports/imports to Cuba

  • Canada trades with Cuba but imposes tariffs on all imports

  • Mexico trades freely with Cuba

2. Customs Unions

• A customs union is an agreement between countries in which all goods/services produced by members are traded tariff free. Additionally, countries agree on common tariff rates on imports from all external (third-party) countries

Countries within the European Union trade freely between themselves and have common barriers with all third-party countries e.g. UK

• In the diagram above, countries in the European Union have eliminated all tariff barriers between themselves but impose common tariff barriers on third party countries such as the UK or China

3. Common Markets

• Similarly, to a customs union, goods/services are traded tariff-free in common markets

• Additionally, the four factors of production flow freely between member countries

  • The goal is to improve the allocation of resources between the common market members and lower the costs of production

  • The European Union is a customs union and a common market

4. Monetary Union

• A monetary union takes integration a step further. Members enjoy all of the benefits of a customs union and common market, but then also establish a common central bank which issues a common currency and controls the monetary policy of member countries

  • Prior to Brexit, the UK was a member of the European Customs Union and common market but never joined the Eurozone

  • At the start of 2023, 20 of the 27 countries in the EU are also members of the Eurozone

Advantages and Disadvantages of Monetary Unions