Trading Blocs, Common Markets, and Economic Unions

Trading Blocs

A trading bloc is defined as a number of nations within a geographical area that guard themselves against imports and non-members. Trading blocs bring countries together and increase the conditions for imports. Regional barriers to trade, i.e., tariffs, within members of a trading bloc are usually low or non-existent. Examples of  trading blocs include the Asia-Pacific Economic Cooperation (APEC) and the Association of Southeast Asian Nations (ASEAN).

Common Markets

A number of nations imposing few or no duties on trade with one another, and a common trade with other nations is called a common market. It is characterized as a free-trade region with relatively free movement of services and capital. Examples include the East African Common Market.

Economic Unions

An economic union is a type of trade bloc that is constituted of a common market with a customs union. The member nations have common policies on regulating products, capital and labor, and freedom of movement of goods and services. For instance, the European Union (EU) is both political and economic.

Motivations for Trading Blocs, Common Markets, and Economic Unions

Getting into New International Markets

When countries cooperate with other countries with whom they share the same political and economic environment, their growing companies enjoy access to new skills. These skills allow companies to navigate the business world with more ease.

Acquiring Knowledge

Firms may realize that they do not have some skills that are required for maximum production. Such a realization may propmt them to form unions that enable them to learn from their partners. For example, companies in developing countries are usually searching for partnerships with their counterparts in more developed countries to provide them with technological advances.

Increasing Available Resources

Many companies sign strategic alliances to use their partners’ manufacturing and/or distribution resources. Using their partner’s resources reduces the companies’ unnecessary investments.

Reducing Future Competition

A lot of countries form trading blocs and unions with countries that are their business competitors. This trick helps minimize chances of future competition.

Gaining Competitive Advantage

Alliances help countries discover new markets and technologies. This enables them increase the competitive position of their businesses.

Suppressing Trade Barriers

Trade blocs eliminate trade barriers and facilitate free and easy movement of factors of production among trading partners, especially those within a trade bloc.

Advantages of Trading Blocs, Common Markets, and Economic Unions

Free Trade

Members have unconstrained access to one another’s markets. As a result, specialization thrives.

Economies of Scale

When producers apply economies of scale, it’s highly beneficial because the increase in markets enables manufacturers to produce more products locally.

Job Creation

A rise in trading activities excites an increment of employment opportunities. Labor then becomes mobile as individuals can move freely from one country to another because of increased opportunities.

Protection

Companies get the added advantage of being protected from cheaper imports that reduce their market share.

Easy Access to Market and Trade Creation

Alliances make it easier for countries to access one another’s markets; hence, trading goes up. Further, due to intermarket interactions, individuals can access lower-priced imports.

Question

If Columbia and Ecuador have free trade between themselves and a common policy excluding non-members from this free trade, then they are a part of a:

1. Customs union.
2. Free trade area.
3. Common market.

Solution

The correct answer is A.

Customs unions allow free movement of goods and services and also form a mutual policy against non-members.

 B is incorrect. A free trade area is a grouping of countries where trade barriers are abolished.

C is incorrect. A common market is a free trade area with relatively free movement of capital and services.