Trading Blocs & the World Trade Organization (WTO) (Edexcel IGCSE Economics)

Types of Trading Blocs

• 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

• The trading blocs below each have an increased level of economic integration

Free trade area (FTA)

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

• 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 (embargo) on all exports/imports to Cuba

  • Canada trades with Cuba but imposes tariffs on all imports

  • Mexico trades freely with Cuba

Customs union

• 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 external tariff rate on imports from all non-bloc countries

• In the diagram above, countries in the European Union have eliminated all tariff barriers between themselves but imposed a common external tariff (CET) on third party countries such as the UK or China

Common market

• In a common market, members act as if they are one country as far as trade is concerned.

• Goods and services are freely traded and in addition, the four factors of production can move unrestricted between member countries

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

  • The European Union is a common market 

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

  • E.g. The Eurozone countries within the European Union

Examples of Trading Blocs

• Three of the largest trading blocs include:

  • The European Union (EU)

  • The Association of Southeast Asian Nations (ASEAN)

  • United States Mexico Canada Agreement (USMCA), previously known as NAFTA (North America Free Trade Agreement)

The European Union (EU)

• The European Union is a common market, originally formed in 1993

• Countries in Europe can apply to join the union and as of June 2024, there are 27 countries in the union

• Being a member of the EU includes free movement of goods, services, labour and capital

  • Countries within the common market have no restrictions between themselves

  • A common external tariff (CET) is imposed on all imports in to any of the member states

• The UK voted to leave the EU in 2016, and officially left in 2020

Association of Southeast Asian Nations (ASEAN)

• ASEAN was originally formed in 1967

• In June 2024, ten countries were part of this free trade area

• The ASEAN free trade area is less integrated than the European Union as it does not allow for the free movement of people or capital between the countries

  • A free trade area aims to achieve free flow of goods and services in the region

  • Free trade areas lower business costs, increase  market size and help businesses to generate economies of scale

 United States-Mexico-Canada Agreement (USMCA)

• This replaced NAFTA in 2020, creating an enhanced free trade area between Canada, Mexico and the USA.

• Many USA businesses relocated their manufacturing to Mexico as goods could be produced there much more cost effectively due to the lower wages paid to Mexican workers

  • The products could then be imported back into the USA without and tariffs being incurred

• Mexico benefited from this agreement as it helped to create many new industries and jobs within the country

  • However, most of the benefits occurred in the north of the country, close to the US border

Impact of Trading Blocs

• Trading blocs, such as a free trade area, common market or customs unions, can have impacts on both member and non-member states

Impact of Trading Blocs on Member and Non-Member States

Role of the World Trade Organisation (WTO)

• The World Trade Organisation (WTO) was established in 1995 to promote free trade

  • They believe free trade is the best way to raise global living standards, create jobs and improve people's lives

• Trade liberalisation is the process of rolling back the barriers to free trade, e.g. removing tariffs 

• The WTO has two main roles in liberalising trade:

1. It brings countries together at conferences and encourages them to reduce or eliminate protectionist trade barriers between themselves, e.g. The Doha Round conferences

2. It acts as an adjudicating body in trade disputes. Member countries can file a complaint if they believe a trading partner has violated a trade agreement. The WTO will then run a hearing and make a judgement (often this takes many years)

• Actions taken by the WTO include:

  • Trade negotiations

  • Implementation and monitoring of trade agreements

  • Dispute settlement between nations

  • Building trade capacity between nations

  • Outreach to governments and influential organisations on behalf of member countries

Conflicts Between Regional Trade Agreements and the WTO

• In December 2023, there were 621 regional trade agreements globally

• While these are beneficial to the members in the agreement (as they strengthen ties and create more trade between them), they also create conflicts with the stated aim of the WTO, which is to liberalise trade

  • Regional agreements often shift trade from a non-member who is more efficient in producing certain goods/services, to a member country who is less efficient (trade diversion)

  • Regional trade members then often institute common trade barriers on non-members, which is the opposite of trade liberalisation (protectionism)

• Regional trade agreements can be beneficial for member countries but may result in global inefficiency in the allocation of resources

• The WTO advocates for free trade between all member countries