Types of Trading Blocs (SL IB Economics)

• 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

• 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

• 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

• 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 Trading Blocs