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Subject 3. Trading Blocs, Common Markets, and Economic Unions PDF Download

Trading Blocs, Common Markets, and Economic Unions

A regional trading bloc is an intergovernmental association that manages and promotes trade activities among countries.

Depending on the level of integration there are different types of regional trading blocs.

  • In a free trade area (FTA), all trade barriers for the goods and services among members are eliminated, but each member maintains its own policies against non-members. Example: NAFTA
  • A customs union is an extension of a FTA. The difference is that all members have a common trade policy against non-members.
  • A common market further extends a customs union by allowing free movement of factors of production among members.
  • An economic union incorporates all aspects of a common market and, in addition, requires common economic institutions and coordination of economic policies among members.
  • In a monetary union, all members adopt a common currency.

Regional integration can be viewed as a movement toward freer trade. There are always many benefits of free trade. However, regional integration can lead to changes in the patterns of trade and impose costs on some groups. For example, two static effects can occur as results of a customs union.

  • Once a union is created, members agree to eliminate tariffs between themselves. The effect is that, facing lower-priced, zero-tariff imports from members, consumers increase their demand for these goods and new trade will be created - a process called trade creation.
  • The major loser in this situation is the previous trading partner left outside the bloc; less trade now exists between new members and their old trading partners. The process of efficient producers losing out to inefficient ones is generally referred to as trade diversion.

The net welfare effect can be either negative or positive.

There are other challenges in the formation of an RTA, such as cultural differences, historical considerations, national sovereignty, etc.

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