Trade creation occurs when there is an increase in the total amount of goods and services traded due to reduced trade barriers within a trading bloc. Trade diversion occurs when buyers in a trading bloc reduces imports from non-member countries in favour of tariff-free products from member countries. This enables businesses within member countries to increase sales within the trading bloc.
TYPES OF TRADING BLOCS
Free trade area – trade freely with each other but have independent policies towards non- member countries
Customs union – free internal trade but agree common policies with the rest of the world (common external tariff)
Common market – reduced barriers with member countries, common external tariff on trade but also policies for free movement for the factors of production
Single market – close to full economic integration, member countries trade freely in all economic resources. All barriers to trade are removed as well as non-tariff barriers
There are increasing numbers of trading blocs in the world, some of the larger ones include: ASEAN, NAFTA and the EU.
ASEAN:
- Began in 1967 and is based in South East Asia (Indonesia, Malaysia, Philippines, Singapore, Thailand, Burma, Laos, Cambodia and Vietnam.
- The purpose was to establish a free trade area and operate in a collaborative way. They have an emphasis on ‘co-operation in economic, cultural, technical and other fields and on the promotion of regional peace and stability’.
- They have an average economic growth rate of 5% and the members have collective population of 633 million.
- They created an agreement with China in 2010 which created a fully-fledged free trade area and eliminated tariffs on 70% of products.
- They have a distinctive philosophy of relying on a consensus to make decisions.
NAFTA:
- This began in 1994 and is between the USA, Canada and Mexico.
- It was intended to break down barriers between the member and in theory was meant to reduce poverty for Mexico.
- It is suggested that NAFTA created 5 million jobs in the USA. There were lowered prices e.g. oil imports from Mexico and increased FDI in all three countries.
- It did also mean there was a loss of jobs in the manufacturing sector (in the US) it also suppressed wages as companies would move production to Mexico to avoid workers joining unions.
EU:
- Began in 1993 and is based primarily in Europe.
- The purpose is to promote peace, establish unified economic and monetary system and promote inclusion.
- They abolished border controls between member countries, making it easier to live, work and travel abroad with the EU.
- The single currency (euro) was adopted in 1999.
- Largest trade bloc in the world and the biggest exporters of manufactured goods and supports 12 million people (through aid) yearly.
- However, the euro contributed to low rates of economic growth. Inefficient policies and net migration causes crowding and extra bureaucracy.
IMPACT OF TRADING BLOCS ON FIRMS
- Access to migrant labour, increasing the supply of labour, helping fill labour shortages
- Access to cheaper raw materials from member states (no import tariffs)
- Access to markets tariff-free
- Ease of access to member countries’ markets leading to rising exports
- Specialism leads to economies of scale, reducing average costs for firms
- Increased competition means that firms must be efficient and innovate but not all firms will be able to survives
- Trade laws may be the same for everyone in the trade bloc, limiting opportunities and meaning that costs may be high due to regulation
- Missed trade opportunities with countries outside of the trading bloc
Growing Interdependence
This is when a change in one economy affects another and there is a greater need for co-operation between countries due to the increasing level of globalisation. The increasing number of trading blocs has created a high level of dependency on the performance of other member countries. It increases the vulnerability of one economy to external shocks from different economies. This means the governmental policies of trading nations will have impacts beyond the borders of one economy.