TRADE BLOCS

AND
TRADE BLOCKS

Submitted By:

Macayan, Carlos Niño B.

Paghunasan, Arvie

Rodriguez, Catherine

Estrada, Koie Jyle M.

Mabalay, Immanuel O.
TRADING BLOCS

Trading blocs are a formal agreement between two or more regional countries that remove trade
barriers between the countries in the agreement while keeping trade barriers for other countries.

TYPES OF TRADING BLOCS

1. Free Trade Area

- Two or more countries form a Free Trade Area in which trade barriers between the countries
are abolished but each country maintains its own tariffs against non-member countries. It
facilitates international trade and the associated gains from trade along with the international
division of labor and specialization.
- Free Trade Areas tend to increase the volume of international trade among member countries
and allow them to increase in their respective comparative advantages.

Examples:

 NAFTA (North American Free Trade Agreement) – one of the largest trade blocs in the world
by gross domestic product. It is an agreement signed by Canada, Mexico, and the United States,
creating a trilateral trade bloc in North America.
 EFTA (European Free Trade Association) – consists of Norway, Iceland, Switzerland and
Liechtenstein
 SAFTA (South Asian Free Trade Area) – comprising Afghanistan, Bangladesh, Bhutan, India,
Maldives, Nepal, Pakistan and Sri Lanka. It is the free trade arrangement of the South Asian
Association for Regional Cooperation.

2. Customs Union
- A Customs Union is like a free trade area except that member countries maintain a common
tariff against non-member countries. It is a partial form of economic integration that offers an
intermediate step between free-trade zones and common markets.
- Under most circumstances this reduction in trade protects certain domestic producers, but it also
translates into higher costs for consumers in both the importing and the exporting country.
3. Common Market
- A Common Market is like a customs union but there is free flow of factors of productions
between the countries. It is a group formed by countries within a geographical area to promote
duty free trade and free movement of labor and capital among its members. Common markets
impose common external tariff (CET) on imports from non-member countries.

Example:

 European community
 No permits are required to work in another member country.
4. Economic Union

- A Economic Union has the same benefits as a common market but there is a common tax system
and employ the same currency. It is a common market with a customs union. The participant
 countries have both common policies on product regulation, freedom of movement of goods, services
and the factors of production (capital and labour) and a common external trade policy.

- The union is aimed at eliminating internal barriers and adopting external barriers towards the free
movement of resources.

Examples:

 European Union (EU) – world’s largest trade bloc. Importing goods and services for more than
100 countries, it is the biggest import market, as well as the biggest exporter in the world.
 CARICOM Single Market and Economy (CSME) – aims to create an economic space for
competitive goods and services to establish a foundation for growth and development of the
Caribbean community.
 Eurasian Economic Union (EEU) – is a political and economic union of states in central and
northern Eurasia.

ADVANTAGES OF TRADE BLOCS

1. Size of Market
- An increase in foreign direct investment results from trade blocs and benefits the economies of
participating nations. It increases local investments since the trading bloc increases the overall
size of markets for firms.
2. Technology
- Open trade leads to faster transfer of technology across borders.
3. Economic Leverage
- Increases economic leverage for the trading bloc as a whole. The larger markets created via
trading blocs permit economies of scale. The average cost of production is decreased because
mass production is allowed.
DISADVANTAGES OF TRADE BLOCS

1. Loss of Sovereignty
- A trading bloc is likely to lead to at least partial loss of sovereignty for its participants.
2. Interdependence
- Because trading blocs increase trade among participating countries, the countries become
increasingly dependent on each other.