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Lusaka Stn.
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Balance of Payts:
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Theories

The Formation of Trading Blocs

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Organisations such the World Trade Organisation aim to free up world trade from trade barriers on a global scale. On a regional scale groups of countries or trade blocs have also been trying to lower trade barriers between them and stimulate regional trade. Increasingly the trade creation effect of regional co-operation is being viewed as an important cause of economic growth. However, the impact of trading blocs also has a trade diversion effect.

There are a number of types of trade blocs:

• Free Trade Areas
• Customs Unions
• Common Market
• Economic Union

Free Trade Area

Sovereign countries belonging to the free trade area trade freely amongst them but have individual trade barriers with countries outside the free trade area. All members have most favoured nation status, which means that they are all treated equally.

Examples include North American Free Trade Area (NAFTA) between the USA, Canada and Mexico; Asia Pacific Economic Cooperation (APEC) and COMESA

Customs Union

The countries are no longer fully sovereign over trade policy. There will be some degree of unification of custom or trade policies. They will have a common external tariff (CET) which is applied to all countries outside the customs union. The countries will be represented at trade negotiations with organisations such as the World Trade Organisation by supra-national organisations e.g. the European Union.

Common Market

This trading bloc is a customs union, which has in addition the free movement of factors of production such as labour and capital between the member countries without restriction. Mercosur is an example of a common market comprising of a number of South American nations.

An Economic Union

This is a common market where the level of integration is more developed. The member states may adopt common economic policies e.g. the Common Agricultural Policy (CAP) of the European Union. They may have a fixed exchange rate regime such as the ERM of the EMU. Indeed, they may have integrated further and have a single common currency. This will involve common monetary policy. The ultimate act of integration is likely to be some form of political integration where the national sovereignty is replaced by some form of over-arching political authority.

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Related Glossary Items:
Common External Tariff
Factors of Production
WTO
Trade Creation
Trade Diversion
Common Market
Customs Union

Related Issues:
COMESA: a case study of a trading bloc
The World Trade Organisation

Related Theories:
Trade Creation and Trade Diversion
Protection:
The Imposition of Quotas
The Imposition of Tariffs and Welfare Loss