Types of Trading Blocs
Preferential trade agreement: two or more countries to lower trade barriers on a particular product Bilateral, regional and multilateral trade agreements: (WTO): Similar thing. Trading Bloc: Group of countries agreeing to reduce tariffs and other trading barriers.
Free trade area: Groups of countries that agree to gradually remove trade barriers. Examples: NAFTA, north America free trade agreement.
- Problem: The lowest importing barrier country will recieve all the imports and sell it to the countries within the group. To mitigate the effects, they make rules of origin to prevent goods from entering countries with lower external barriers.
Customs union: The same as free trade, except theres also policy to non-members.
Common market: All countries can engage in free trade and movement of factors of production, which is a good thing. There can be movement of capital to places there are shortaged, employees have larger markets to seek work. The downside is that it takes a long time, and governments have to live with the fact they are handing over lots of power to some organization. Less sovereignty. So thats why theres so little of them. Two common examples include the EEC, european economic community, and the one in the Carribean.
Evaluation
- Trade Creation: There are more imports, which will overall decrease the downsides of tariffs and increase social welfare.
- Economies of Scale: A larger market provides the environment for economies of scales to survive and thrive. Also increases investment.
- Stronger bargaining power: In larger organizations, the bloc will have more bargaining power than if they were individual states.
- Trade diversion: Higher importing costs from importing from countries inside bloc instead of the better outer ones.
- Challenges trading organizations: Splitting countries into blocs is not helpful for reducing tariffs on all